-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Lf1WFIMEOoZPFEIh670Wf4SOuWEb6RwKmi709YFX7xIEPH0cv3kDSMuRwBVnBjMj K3QVO7zFue2lMYpAdVk6Cg== 0000950137-97-001690.txt : 19970502 0000950137-97-001690.hdr.sgml : 19970502 ACCESSION NUMBER: 0000950137-97-001690 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19970131 FILED AS OF DATE: 19970501 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MFRI INC CENTRAL INDEX KEY: 0000914122 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL & COMMERCIAL FANS & BLOWERS & AIR PURIFYING EQUIP [3564] IRS NUMBER: 363922969 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-18370 FILM NUMBER: 97593650 BUSINESS ADDRESS: STREET 1: 7720 LEHIGH AVE CITY: NILES STATE: IL ZIP: 60714 BUSINESS PHONE: 8479661000 MAIL ADDRESS: STREET 1: 7720 LEHIGH AVE CITY: NILES STATE: IL ZIP: 60714 FORMER COMPANY: FORMER CONFORMED NAME: MIDWESCO FILTER RESOURCES INC DATE OF NAME CHANGE: 19970402 10-K405 1 10-K405 1 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 --------------- FORM 10-K X ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE - --- SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended January 31, 1997 OR TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE - --- ACT OF 1934 (NO FEE REQUIRED) For the transition period from to --------------- -------------- COMMISSION FILE NO. 0-18370 MFRI, INC. (Exact name of registrant as specified in its charter) DELAWARE 36-3922969 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 7720 LEHIGH AVENUE NILES, ILLINOIS 60714 (847) 966-1000 (Address of principal executive (Issuer's telephone number, offices, including zip code) including area code) Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $.01 PER SHARE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ The aggregate market value of the voting securities of the registrant beneficially owned by non-affiliates of the registrant (the exclusion of the market value of the shares owned by any person shall not be deemed an admission by the registrant that such person is an affiliate of the registrant), at March 31, 1997 was approximately $29,268,000. The number of shares of the registrant's common stock outstanding at March 31, 1997 was 4,965,329. DOCUMENTS INCORPORATED BY REFERENCE Portions of the following document of the registrant are incorporated herein by reference: DOCUMENT PART OF FORM 10-K -------- ----------------- Proxy Statement for the 1997 annual meeting of III stockholders 2 PART I ITEM 1. BUSINESS MFRI, Inc. ("MFRI") has three business segments: Filtration Products, Piping System Products and Industrial Process Cooling Equipment. The Company's Filtration Products Business is carried out by Midwesco Filter Resources, Inc. ("Midwesco Filter"), the Piping System Products business is carried out by Perma-Pipe, Inc. ("Perma-Pipe") and the Industrial Process Cooling Equipment Business is carried out by the Thermal Care Division ("Thermal Care"). Midwesco Filter and Perma-Pipe are wholly-owned subsidiaries of MFRI. As used herein, unless the context otherwise requires, the term Company includes MFRI, Midwesco Filter, Perma-Pipe, Thermal Care, and its subsidiaries, and their predecessors Midwesco Filter manufactures and sells a wide variety of filter bags for baghouse air pollution control and particulate collection systems. Baghouses are used in a wide variety of industries in the United States and abroad to limit particulate emissions, primarily to comply with environmental regulations, markets filter bag-related products and accessories, and provides maintenance services, consisting primarily of dust collector inspection and filter bag retensioning and replacement. Perma-Pipe engineers, designs and manufactures specialty piping systems and leak detection and location systems. Perma-Pipe's piping system products include (i) secondary containment piping systems for transporting hazardous fluids and petroleum products and (ii) insulated and jacketed district heating and cooling piping systems for efficient energy distribution to multiple locations from central energy plants. Perma-Pipe's leak detection and location systems are sold as part of many of its piping system products, and, on a stand alone basis, to monitor areas where fluid intrusion may contaminate the environment, endanger personal safety, cause a fire hazard or damage equipment or property. Thermal Care engineers, designs and manufactures coolers for industrial purposes. On December 30, 1996, the Company acquired Thermal Care and certain other specified assets and liabilities of Midwesco, Inc. by the merger of Midwesco, Inc. with and into MFRI (the "Thermal Care Merger"). Through the Thermal Care Merger, an aggregate of 2,124,298 shares of common stock of MFRI were issued to the shareholders of Midwesco, Inc. and the 1,717,666 shares of common stock of MFRI owned by Midwesco, Inc. immediately prior to the consummation of the Thermal Care Merger were cancelled. The information required with respect to the Company's lines of business is included in the financial statements and related notes thereto. 3 FILTRATION PRODUCTS AIR POLLUTION CONTROL AND PARTICULATE COLLECTION SYSTEMS. Air pollution control and particulate collection systems have been used for over 50 years in many industrial applications. However, the enactment of federal and state legislation and related regulations and enforcement have increased the demand for air pollution control and particulate collection systems by requiring industry to meet primary and secondary ambient air quality standards for specific pollutants, including particulate. In certain manufacturing applications, particulate collection systems are an integral part of the production process. Examples of such applications include the production of cement, carbon black and industrial absorbants. The principal types of industrial air pollution control and particulate collection systems in use today are baghouses, electrostatic precipitators, scrubbers and mechanical collectors. The type of technology most suitable for a particular application is a function of such factors as the ability of the system to meet applicable regulations, initial investment, operating costs and the parameters of the process, including operating temperatures, chemical constituents present, size of particulate and pressure differential. A baghouse is typically a large box-like structure which operates in a manner similar to a vacuum cleaner. It can contain a single filter bag or an array of several thousand cylindrical or envelope bags (as short as two feet or as long as 30 feet), within a housing which is sealed to prevent the particulate from escaping. Exhaust gases are passed through the baghouse, and the particulate is captured on the fabric of the filter bag. The particulate is removed from the bag by such methods as mechanical shaking or reverse air flow. Baghouses are generally used with utility and industrial boilers, cogeneration plants and incinerators and in the chemicals, cement, asphalt, metals, grain and foundry industries. In an electrostatic precipitator, the particulate in the gases is charged as it passes electrodes and is then attracted to oppositely charged collection plates. The collected material is periodically removed from the plates by rapping or vibration. Electrostatic precipitators are used in such industries as electric power generation, chemicals and pulp and paper as well as in incinerators. Scrubbers are used for flue gas desulfurization, odor control, acid gas neutralization and particulate collection. They operate by bringing gases into contact with water or chemicals and are sometimes used in combination with baghouses or electrostatic precipitators. Mechanical collectors are used to remove relatively large particles from airstreams. They are frequently used in association with other systems as a pre-screening device. Because air pollution control equipment represents a substantial capital investment, such systems usually remain in service for the entire life of the plant in which they are installed. A baghouse can last up to 30 years and is typically rebagged six to eight times during its useful life. Although reliable industry statistics do not exist, the Company believes there are over 18,000 locations in the United States presently using baghouses, many of which have multiple baghouses. 2 4 PRODUCTS AND SERVICES. The Company manufactures and sells a wide variety of filter bags for baghouse air pollution control and particulate collection systems. Baghouses are used in a wide variety of industries in the United States and abroad to limit particulate emissions, primarily to comply with environmental regulations. The Company manufactures filter bags in standard industry sizes, shapes and fabrics and to custom specifications, maintaining manufacturing standards for over 8,000 styles of filter bags to suit substantially all industrial applications. Filter bags are manufactured from industrial yarn and fabric purchased in bulk. Most filter bags are produced from acrylic, fiberglass, polyester, aramid or polypropylene fibers. The Company also manufactures bags from more specialized materials, sometimes using special finishes. The Company manufactures substantially all of the seamless tube filter bags sold in the United States. Seamless Tube(TM) filter bag fabric is knitted by the Company on custom knitting equipment and finished using proprietary fabric stabilization technology. The Company believes this vertically integrated process gives it certain advantages over purchased fabric, including lower costs and reduced inventory requirements. In addition, the Company believes its Seamless Tube(TM) product offers certain users a superior performing filtration medium because of its fabric structure, weight and lack of a vertical seam. In certain applications, the knitted fabric structure allows equal airflows with a lower pressure differential than conventionally woven fabrics, thereby reducing power costs. In other circumstances, the fabric structure and absence of a vertical seam allows greater airflow at the same pressure differential as conventionally woven fabrics, thereby permitting the filtration of a greater volume of particulate laden gas at no additional cost. The Seamless Tube(TM) product often improves filter bag durability, resulting in longer life. The Company also markets numerous filter bag-related products and accessories used during the installation, operation and maintenance of baghouses, including welded wire cages, which support filter bags, spring assemblies for properly tensioning filter bags, and clamps and hanger assemblies for attaching filter bags. Additionally, the Company markets other hardware items used in the operation and maintenance of baghouses, including sonic horns to supplement the removal of particulate from the filter bag and baghouse parts such as door gaskets, shaker bars, tube sheets, dampers, solenoid valves, timer boards, conveyors and airlocks. During fiscal 1995, the Company began commercial operation of a manufacturing facility to produce welded wire cages. The Company currently purchases all other filter bag-related products and accessories for resale, including the exclusive North American marketing rights to a Korean-manufactured line of solenoids, valves and timers used in conjunction with pulsejet baghouses. The Company also provides maintenance services, consisting primarily of dust collector inspection and filter bag retensioning and replacement using a network of independent contractors. The sale of filter bag-related products and accessories and baghouse inspection, leak detection and maintenance services accounts for approximately 15% of the net sales of the Company's filtration products and services. 3 5 Over the past three years, the Company's filtration products business has served over 3,000 user locations. The Company has particular expertise in supplying filter bags for use with electric arc furnaces in the steel industry. The Company believes its production capacity and quality control procedures make it a leading supplier of filter bags, in terms of sales, to large users in the electric power industry. Orders from that industry tend to be substantial in size but are usually at reduced margins. In the fiscal year ended January 31, 1997 ("fiscal 1997"), no customer accounted for 10% or more of net sales of the Company's filtration products and services. MARKETING. The customer base for the Company's filtration products and services is industrially and geographically diverse. These products and services are used primarily by operators of utility and industrial coal-fired boilers, incinerators and cogeneration plants and by producers of metals, cement, chemicals and other industrial products. The Company has an integrated sales program for its filtration products business which consists of field-based sales personnel, manufacturers' representatives, a telemarketing operation and a computer-based customer information system containing data on over 15,000 user locations. This system enables the Company's sales force to access customer information classified by industry, equipment type, operational data and the Company's quotation and sales history. The system reminds the telemarketing personnel when each customer is due to be called and maintains the name and position of the customer contact. The Company believes its computer-based information system is instrumental in increasing its sales of filter bag-related products and accessories and maintenance and rebagging services. The Company is adding to its database for each of these user locations sufficient information to support such sales. In 1992, the Company intensified its efforts to market its filtration products internationally by hiring employees for a new department created specifically to target major users in foreign countries. Export sales have increased steadily and totalled 15.7% of filtration products sales in the year ended January 31, 1997. The Company believes that international sales of its filtration products have a substantial future potential for growth. BACKLOG. As of January 31, 1997, the dollar amount of backlog (uncompleted firm orders) was approximately $6,832,000. As of January 31, 1996, the amount of backlog was approximately $8,000,000. All of the backlog as of January 31, 1997 is expected to be completed in the fiscal year ending January 31, 1998 ("fiscal 1998"). RAW MATERIALS AND MANUFACTURING. The basic raw materials used in the manufacture of the Company's filtration products are industrial fibers and fabrics supplied by leading producers of such materials. The greatest volume of raw material purchases are of woven fiberglass fabric, yarns for manufacturing Seamless Tube(TM) product and other woven and felted fabrics. For some of these materials, there are only a limited number of suppliers. From time to time, any of these materials could be in short supply, adversely affecting the Company's business. The Company believes supplies of such materials are adequate to meet current demand. The Company's 4 6 inventory includes substantial quantities of various types of fabrics because lead times from suppliers are frequently longer than the delivery time required by customers. The manufacturing processes for the filtration products include proprietary computer controlled systems for measuring, cutting, tubing and marking fabric. The Company also operates a number of special knitting machines and two proprietary fabric stabilization lines to produce its Seamless Tube(TM) product. On May 25, 1995, the Company purchased the assets and business which Armtex, Inc. had used in the manufacture of knitted filtration fabrics. On August 15, 1996, the Company purchased the assets and business of Eurotech Air Filtration, Inc., an Oregon corporation, a supplier of pleated filtration elements. The Company plans to manufacture these products at its Winchester, Virginia facilities. The finish assembly work on each filter bag is performed by skilled sewing machine operators using both standard sewing equipment and specialized machines developed by or for the Company. The Company maintains a quality assurance program involving statistical process control techniques for examination of raw materials, work in progress and finished goods. Certain orders for particularly critical applications receive 100% quality inspection. COMPETITION. The filtration products business is highly competitive. In addition, new installations of baghouses are subject to competition from alternative technologies. The Company believes that, based on domestic sales, BHA Group, Inc., the Menardi-Criswell division of Hosokawa Micron International, Inc., W.L. Gore & Associates, Inc. and the Company are the leading suppliers of filter bags, parts and accessories for baghouses. There are at least 30 smaller competitors, most of which are doing business on a regional or local basis. Some of the Company's competitors have greater financial resources than the Company. The Company believes price, service and quality are the most important competitive factors in its filtration products business. Often, a manufacturer has a competitive advantage when its products have performed successfully for a particular customer in the past. In such instances, additional efforts are required by a competitor to market products to such a customer. In certain applications, the Company's proprietary Seamless Tube(TM) product and customer support provide the Company with a competitive advantage. Certain competitors of the Company may have a competitive advantage because of their proprietary products and processes, such as specialized fabrics and fabric finishes. In addition, some competitors may have cost advantages with respect to certain products as a result of lower wage rates and greater vertical integration. GOVERNMENT REGULATION. The Company's filtration products business to a large extent is dependent upon government regulation of air pollution at the federal and state levels. Federal clean air legislation requires compliance with national primary and secondary ambient air quality standards for specific pollutants, including particulate. The states have primary responsibility for implementing these standards, and in some cases, have adopted more stringent standards than those adopted by the U.S. Environmental Protection Agency under the Clean Air Act Amendments of 1990 ("Clean Air Act Amendments"). Although there can be no assurances as 5 7 to what the ultimate effect, if any, the Clean Air Act Amendments will have on the Company's filtration products business, the Company believes that the Clean Air Act Amendments are likely to have a long term positive effect on demand for its filtration products and services. The current initiative of the U.S. EPA to reduce the size of particulates regulated by the National Air Quality Standard from 10 microns to 2.5 microns could have a significant positive effect on the demand for the Company's filtration products in future years. PIPING SYSTEM PRODUCTS PRODUCTS AND SERVICES. The Company engineers, designs and manufactures specialty piping systems and leak detection and location systems. The Company's piping system products include (i) secondary containment piping systems for transporting hazardous fluids and petroleum products and (ii) insulated and jacketed district heating and cooling piping systems for efficient energy distribution to multiple locations from central energy plants. The Company's leak detection and location systems are sold as part of many of its piping system products, and, on a stand alone basis, to monitor areas where fluid intrusion may contaminate the environment, endanger personal safety, cause a fire hazard or damage equipment or property. The Company's leak detection and location systems consist of a sensor cable attached to a microprocessor which utilizes a proprietary software program. The system sends pulse signals through the center of the sensor cable, which is positioned in the area to be monitored (e.g., along a pipeline in the ground or in a subfloor), and employs a patented digital mapping technique to plot pulse reflections, to continuously monitor the sensor cable for anomalies. The system is able to respond to between one and three feet of wetted cable depending upon the length of the monitored cable and is able to determine the location of wetted cable within five feet. Once wetted cable is detected, the microprocessor utilizes graphics software to illustrate the location of the leak. The Company offers a variety of cables specific to different environments. The Company's leak detection and location systems can sense the difference between water and petroleum products and can detect multiple leaks. With respect to these capabilities, the Company believes that its systems are superior to systems manufactured by other companies. Once in place, the Company's leak detection and location system can be monitored off-site because the system can communicate with computers through telephone lines. The Company's leak detection and location systems are being used to monitor fueling systems at airports including those located in Denver, Colorado, Atlanta, Georgia, Frankfurt, Germany, and Hamburg, Germany, and in many clean rooms, including such facilities operated by IBM, Intel and Motorola. The Company believes it is the only major supplier of the type of piping systems sold by it in the United States that manufactures its own leak detection and location systems. The Company's secondary containment piping systems, manufactured in a wide variety of piping materials, are generally used for the handling of hazardous liquids and petroleum products. Secondary containment piping systems consists of service pipes housed within outer containment pipes, which are designed to contain any leaks from the service pipes. Each system is designed to provide economical and efficient secondary containment protection that will meet 6 8 all governmental environmental regulations. In 1990, the Company developed the Double-Quik(R) thermoplastic secondary containment piping systems with leak detection and location capabilities. This system is installed by using a technique that allows simultaneous thermal welding of the service pipe and the containment pipe in a single process, with a leak detection messenger cable in place. The leak detection messenger cable is to be used subsequently to pull in the leak detection sensor cable. In June 1993, the Company was granted a patent on the special equipment designed to accomplish this process. The Company's district heating and cooling piping systems are designed to transport steam, hot water and chilled water to provide efficient energy distribution to multiple locations from a central energy plant. These piping systems consist of a carrier pipe made of steel, iron, copper or fiberglass; insulation made of mineral wool, calcium silicate or polyurethane foam; and an outer conduit of steel, fiberglass, polyethylene or PVC. The Company manufactures several types of piping systems using different materials, each designed to withstand certain levels of temperature and pressure. The Company's piping systems normally are custom fabricated to job site dimensions and frequently incorporate provisions for thermal expansion due to varying temperatures. This custom fabrication helps to minimize the amount of labor required by the installation contractor. In fiscal 1997, no single customer accounted for more than 10% of the net sales of the Company's piping system products. Most of the Company's piping system products are produced for underground installations and therefore require trenching which is done by unaffiliated installation contractors. Generally, sales of the Company's piping system products tend to be lower during the winter months, due to weather constraints over much of the country. The Company's leak detection and location systems and its secondary containment piping systems are used primarily by operators of military and commercial airport fueling systems, oil refineries, pharmaceutical companies, chemical companies, and in museums, dry storage areas and tunnels. The Company's district heating and cooling systems are used primarily at prisons, housing developments, military bases, cogeneration plants, hospitals and college campuses. The Company believes many district heating and cooling systems in place are 30 to 50 years old and ready for replacement. Replacement of district heating and cooling systems is often motivated by the increased cost of operating older systems due to leakage and heat loss. MARKETING. The Company's piping system products are used by industrially and geographically diverse customers. The Company employs one national sales manager and seven regional sales managers who utilize and assist a network of approximately 85 domestic independent manufacturer's representatives, none of whom sell products that are competitive with the Company's piping system products. The Company also sells its piping systems and leak detection and location systems in Europe, through its wholly owned subsidiaries Perma-Pipe Services, Ltd. and SZE Hagenuk GmbH ("SZE Hagenuk"). In addition, the Company has other arrangements to market its patented leak detection and location systems in many other foreign countries through agents. 7 9 PATENTS, TRADEMARKS AND APPROVALS. The Company owns several patents covering the features of its electronic leak detection system, which expire commencing in 2006 and thereafter. In addition, the Company's leak detection system is listed by Underwriters Laboratories and the U.S. Environmental Protection Agency and is approved by Factory Mutual and the Federal Communication Commission. The Company is also approved as a supplier of underground district heating systems under the federal government guide specifications for such systems. The Company also owns numerous trademarks connected with its piping business. In addition to Perma-Pipe(R), the Company owns other trademarks for its piping and leak detection systems including the following: Chil-Gard(R), Double-Pipe(R), Double-Quik(R), Escon-A(R), Ferro-Shield(R), Galva-Flex(R), Galva-Gard(R), Hi Gard(R), Imperial(R), Poly-Therm(R), Pal-AT(R), Ric Wil(R), Ric-Wil Dual Gard(R), Stereo-Heat(R), Safe-T-Gard(R) and Uniline(R). The Company also owns United Kingdom trademarks for Poly-Therm(R), Perma-Pipe(R) and Ric-Wil(R), a Canadian trademark for Ric-Wil(R) and a German trademark for Leacom(R). BACKLOG. As of January 31, 1997, the dollar amount of backlog (uncompleted firm orders) was approximately $14,500,000, all of which is expected to be completed in fiscal 1998. As of January 31, 1996, the amount of backlog was approximately $21,200,000. The higher backlog at January 31, 1996 was largely due to the late fourth quarter booking of a large secondary containment order for a U.S. government installation. RAW MATERIALS AND MANUFACTURING. The basic raw materials used in the production of the Company's piping system products are carbon steel, alloy, plastic and fiberglass mostly purchased in the form of pipe or tube. Although such materials are generally readily available, there may be instances when any of these materials could be in short supply. The Company believes supplies of such materials are adequate to meet current demand. The sensor cables used in the Company's leak detection and location systems are manufactured to the Company's specifications by companies regularly engaged in the business of manufacturing such cables. The Company owns patents for some of the features of its sensor cables. The monitoring component of the leak detection and location system is assembled by the Company from standard components purchased from many sources. The Company's proprietary software is installed onto the system on a read only memory chip. The Company's manufacturing processes for its piping systems include equipment and techniques to fabricate piping systems from a wide variety of materials, including carbon steel, alloy, copper and plastic piping, and engineered thermoplastics and fiberglass reinforced polyesters and epoxies. The Company uses computer-controlled machinery for electric plasma metal cutting, filament winding, pipe coating, insulation foam application, pipe cutting and pipe welding. The Company employs skilled workers for carbon steel and alloy welding to various code requirements. The Company is authorized to apply the American Society of Mechanical Engineers code symbol stamps for unfired pressure vessels and pressure piping. The Company's inventory includes various types of pipe, tube, insulation, pipe fittings and other components used 8 10 in its products. The Company maintains a quality assurance program involving lead worker sign-off of each piece at each work station and non-destructive testing protocols. COMPETITION. The Company believes the competitors for its piping system products generally include those competing in the district heating and cooling market, specialty manufacturers of contained piping systems that offer a limited number of pipe material choices, and leak detection and location system manufacturers that sell in the piping market and the stand alone leak detection system market. The piping system products business is highly competitive. The Company believes its competition in the district heating and cooling market consists of two other national companies, Rovanco Piping Systems, Inc. and Thermacor Process, Inc. neither of which dominates this market, and numerous regional competitors. The Company's secondary containment piping systems have a wider range of competitors than those in the district heating and cooling market and include Asahi/America, Guardian by Chemtrol and GF Plastics Systems. Products competitive with the Company's leak detection and location systems include: (1) cable-based systems manufactured by the TraceTek Division of Raychem; (2) linear gaseous detector systems manufactured by Tracer Technologies and Arizona Instrument Corp; and (3) probe systems manufactured by Redjacket, as well as several other competitors that provide probe systems for the service station and hydrocarbon leak detection industries. The Company believes that price, quality, service and a comprehensive product line are the key competitive factors in the Company's piping system products business. The Company believes it has a more comprehensive line of piping system products than any of its competitors. Certain competitors of the Company have cost advantages as a result of manufacturing a limited range of products. Some of the Company's competitors have greater financial resources than the Company. GOVERNMENT REGULATION. The demand for the Company's leak detection and location systems and secondary containment piping systems is driven primarily by federal and state environmental regulation with respect to hazardous waste. The Federal Resource Conservation and Recovery Act requires, in some cases, that the storage, handling and transportation of certain fluids through underground pipelines feature secondary containment and leak detection. The National Emission Standard for Hydrocarbon Airborne Particulates, which requires reduction of airborne volatile organic compounds and fugitive emissions, has caused many major refineries to recover fugitive vapors and dispose of the recovered material into the process sewer system which then becomes a hazardous waste system required to be secondarily contained. Although there can be no assurances as to the ultimate effect of these government regulations, the Company believes they will increase the demand for its piping system products. INDUSTRIAL PROCESS COOLING EQUIPMENT PRODUCTS AND SERVICES. The Company's Thermal Care division engineers, designs and manufactures coolers for industrial purposes. The Company's cooling products include (i) chillers (portable and central); (ii) cooling towers; (iii) plant circulating systems; (iv) water, hot oil, and 9 11 negative pressure temperature controllers; (v) water treatment equipment and (vi) various other accessories and replacement parts relating to the foregoing products. The Company's cooling products are used to optimize manufacturing productivity by quickly removing heat from manufacturing processes. The principal market for the Company's cooling products is the plastics processing industry. The Company also sells its products to OEM's, other cooling manufacturers on a private branded basis and to manufacturers in the laser, metallizing, and reaction injection molding industries. The Company combines chillers or cooling towers and plant circulating equipment to create plant-wide systems that account for a large portion of its business. The Company specializes in customizing cooling systems according to customer orders. Chillers. Chillers are refrigeration units designed to provide cool water to a process for the purpose of removing heat from the process and transferring that heat to an area where it can be dissipated. This heat is either dissipated using air (air cooled chillers) or water (water cooled chillers). Water cooled chillers use a cooling tower to transfer the heat from the chiller using water and then releasing the heat to the atmosphere with the cooling tower. The Company believes that it manufactures the most complete line of chillers available in its primary market (plastics processing). The Company's line of portable chillers are available from 1/2 horsepower to 40 horsepower and incorporate a new microprocessor that is capable of computer communications. While portable chillers are considered to be a commodity product by many customers, the Company believes that its new unit enables it to provide the customer with quality, features, and benefits at a competitive price. Central chillers are used for plant wide cooling, and while some models incorporate their own pump and tank, most are sold with a separate pumping system. The Company is currently the only manufacturer to offer as many types of central water and remote air cooled chillers. These chillers are distinguished by the manner in which the compressor (refrigerant pump) and the evaporator (heat exchanger water to refrigerant) is utilized in the chiller. The Company believes that its ability to offer this variety of units and the extensive use of PLC (Programmable Logic Controls) provides it with a unique concept sales advantage. The Company's central chillers are available from 10 horsepower to 125 horsepower per refrigeration section. Cooling Towers. A cooling tower is essentially a cabinet with heat transfer fill media that has water flow down across the fill while air is pulled up by a fan motor through the fill. Cooling takes place by evaporation. Cooling towers are located outdoors and are designed to provide approximately 85 degrees F water to remove heat from water cooled chillers, air compressors, hydraulic oil and other processes that can effectively be cooled with such water. The Company markets two lines of cooling towers. The FT series towers were introduced in 1984 and at the time were the first fiberglass cooling towers to be sold in the U.S. The cabinets for these towers are imported from Taiwan and are available in sizes ranging from three 10 12 to 850 tons. (One tower ton equals 12,000 BTU/hour of heat removal). Fiberglass cooling towers have achieved high popularity and are available from many suppliers. The FC fiberglass tower line, which is designed and engineered by the Company and which the Company believes is the highest quality cooling tower in the market today, is available from 80 to 200 tons. Plant Circulating Systems. The Company manufactures and markets a variety of tanks in various sizes with pumps and piping arrangements that utilize alarms and other electrical options. Thus, each system is unique and customized to meet customers' individual needs. These plant circulating systems are used as an integral part of central tower and chiller systems. This product line was expanded in Fiscal 1997 with the introduction of FRP tanks. Temperature Control Units. Most temperature control units are used by injection molders of plastic parts to remove heat from the molds at an elevated temperature for the purpose of improving part quality. The recent introduction of the Company's totally redesigned unit, the RA series, has resulted in a doubling of temperature control unit sales. Over 90% of the temperature control units sold in the industry are water units. The remaining units use oil as the heat transfer medium. The Company sells an oil temperature control unit manufactured in Denmark pursuant to an exclusive marketing agreement for North America. Water Treatment Equipment and Accessories. Sold as an accessory to cooling tower systems, water treatment equipment must be used to protect the equipment that is being cooled. The Company sells units manufactured to its specifications by a supplier that provides all the equipment needed to properly treat the water. While a relatively small part of Thermal Care's business, this arrangement allows the Company to offer a complete system to its cooling products customers. In addition, the Company provides other items to complement a system that is purchased from a supplier and usually drop shipped directly to a customer; principally, heat exchangers, filtration systems, special valves, and "radiator type" coolers. Parts. The Company strives to fill parts orders within 24 hours and sells parts at competitive margins in order to enhance new equipment sales. MARKETING. In general, the Company sells its cooling products to five different markets. 1. The domestic plastics market is the largest market served by the Company, representing the core of its business. There are approximately 8,000 companies processing plastic products in the United States, primarily using injection molding, extrusion, and blow molding machinery. The Company believes that the total market for water cooling equipment in the plastics industry is $120 million annually, and that the Company is the third largest supplier of heat transfer equipment to the plastics industry with a market share of 14% to 16%. The Company believes that the plastics industry is a mature industry with growth generally consistent with that of the national economy. Due to the high plastics content in many major consumer items, such as cars and appliances, this industry experiences economic cyclical activity. The Company believes that it is recognized in the domestic plastics market as a quality equipment 11 13 manufacturer and that the Company will be able to maintain its market share with opportunities for increased share through product development. The Company's cooling products are sold through independent manufacturers' representatives on an exclusive territory basis. Seventeen agencies are responsible for covering the United States and are supported by four Thermal Care regional managers. 2. The primary emphasis for the sale of the Company's cooling products outside the United States has been in Latin America and through system design consultants' assembly of complete world wide PET (plastic bottle) plants, significant numbers of which are being built by large companies. This activity is currently recovering from a decline in recent years due to the devaluation of the Mexican peso. The Company believes that Thermal Care has a significant opportunity for growth due to the high quality of its equipment and the fact that it offers complete and integrated system design. Many United States competitors do not provide equipment outside of the U.S., and while there are European competitors selling equipment in Latin America, the Company believes that they lack system design capabilities and have a significant freight disadvantage. The Company markets its cooling products through a combination of manufacturers' representatives, distributors, and consultants, some of which are recognized as the leaders in the distribution of plastics machinery throughout Latin America. 3. A relatively small percentage of the Company's cooling products are sold to smaller competitors on a private branded basis. The margins on this equipment are lower; however, such sales are primarily in product lines where the incremental volume is of significant benefit in Thermal Care's manufacturing process. The Company believes that there are a number of companies that could participate with it in this type of name branding activity. 4. The Company sells cooling towers to the HVAC industry, primarily to contractors or commercial/governmental facilities, for cooling the condensers of chillers used to provide air conditioning. The Company believes that the size of this market exceeds $300 million annually, but the Company's market share is low due to the relatively high pricing of its high quality products. The Company's cooling towers are sold through either manufacturers' representatives or distributors. 5. An increasing share of the Company's sales is to non-plastics industries that require specialized heat transfer equipment, usually sold to end-users as a package by the supplier of the primary equipment. The Company's sales in the laser, metallizing and reaction injection molding industries have been particularly strong. The Company believes that the size of this market is over $200 million annually. The Company expects growth in this market due to its ability to work with OEM customers that perceive the Company to be a quality supplier. Distribution of products in this market is generally handled by the OEM. The Company is establishing a manufacturers' network to cover approximately one half the U.S. TRADEMARKS. The Company has applied for registration of the trademark, "Thermal Care", with the U.S. Patent and Trademark Office. 12 14 BACKLOG. As of January 31, 1997, the dollar amount of Thermal Care's backlog (uncompleted firm orders) was approximately $4,513,000. As of January 31, 1996, the amount of backlog was approximately $4,116,000. Substantially all of the backlog as of January 31, 1997 is expected to be completed before January 31, 1998. RAW MATERIALS AND MANUFACTURING. Thermal Care's production facility uses approximately 35,000 square feet with an additional 15,000 square feet of inventory storage space. The plant layout is designed to facilitate movement through multiple work centers. Thermal Care uses the Manufacturing Accounting Production Inventory Control System (MAPICS) to support its manufacturing operations. The status of the customer order at any given moment can be determined through the MAPICS System. The Company utilizes prefabricated sheet metal and sub-assemblies manufactured by both Thermal Care and outside vendors for temperature controller manufacture. This reduces the labor to complete finish goods. The production line for the product is self-contained, allowing the Company to assemble, wire, test, and crate the units for shipment with minimal handling. FT towers up to 100 tons in capacity are assembled to finished goods inventory, which allows the Company to meet quick delivery requirements. Towers over 100 tons in capacity are shipped for field assembly. The Company employs field technicians that can assist the customer with assembly. FT cooling towers are manufactured using fiberglass and hardware components purchased from a Taiwanese manufacturer, which is the Company's sole source for such products. The wet deck is cut from bulk fill material and installed inside the tower. Customer-specified options can be added at any time. The FC towers are rectangular in design and are engineered by the Company. Two different cabinet sizes of the FC tower account for 16 different model variations from 80 through 200 tons. All FC cooling towers are assembled at the Company's Niles facility. FC towers can be shop assembled before shipment. The Company assembles all plant circulating systems by fabricating the steel to meet the size requirements and adding purchased components to meet the customer specifications. Electrical control boxes assembled in the electrical panel shop are then added to the tank and hardwired to all electrical components. The interior of carbon tanks is coated with an immersion service epoxy and the exterior is painted in a spray booth. The Company now offers stainless steel and fiberglass tanks to meet the need for noncorrosive applications. Portable chillers are assembled using components manufactured by the Company and supplied by outside vendors. Small air cooled portable chillers are assembled using a condensing unit, a non-corrosive tank, hose, and prepainted sheet metal. Many of the components in these chillers are fabricated as sub-assemblies and held in inventory. Once the water and refrigeration components have been assembled, the unit is moved to the electrical department for the addition of control sub-assemblies and hardwiring. The chillers are then evacuated, charged with 13 15 refrigerant and tested under fully loaded conditions. The final production step is to clean, insulate, label, and crate the chiller for shipment. Central chillers are manufactured to customer specifications. Many of the components are purchased to the job requirements and production is planned so that sub-assemblies are completed to coincide with the work center movements. After mechanical and electrical assembly, the chiller is evacuated, charged with refrigerant and tested at full and partial load conditions. The equipment is then insulated and prepared for painting. The final production step completes the quality control inspection and prepares the unit for shipment. The Company believes that there are approximately 13 competitors selling cooling equipment in the domestic plastics processing equipment market. Three manufacturers, including the Company, collectively share approximately 75% of the market. Some potential foreign customers with relatively small cooling needs are able to purchase small refrigeration units (portable chillers) that suit their needs and are manufactured in their respective local markets at prices below that which the Company can offer competing products. However, such local manufacturers often lack the technology and products needed for plant-wide cooling. The Company believes that its positive reputation for producing quality plant-wide cooling product results in a significant portion of the business in this area. The Company believes that price, quality, service and a comprehensive product line are the key competitive factors in Thermal Care's business. The Company believes that it has a more comprehensive line of cooling products than any of its competitors. Certain competitors of Thermal Care have cost advantages as a result of manufacturing in non-union and more modern/efficient shops and of offering a limited range of products. Some of Thermal Care's competitors have greater financial resources than the Company. GOVERNMENT REGULATION. The Company does not expect compliance with Federal, State and local provisions regulating the discharge of materials into the environment or otherwise relating to the protection of the environment to have a material effect upon the capital expenditures, earning or competitive position of Thermal Care, nor is management aware of the need for any material capital expenditures for environmental control facilities for the remainder of the current fiscal year or for the foreseeable future. Although regulations recently promulgated under the Federal Clean Air Act prohibit the manufacture and sale of certain refrigerants, none of these refrigerants are used by the Company in its products. Although there can be no assurance as to the ultimate effect on the Company of the Clean Air Act and related laws, the Company expects that suitable refrigerants conforming to Federal, State and local laws and regulations will continue to be available to the Company. 14 16 EMPLOYEES As of March 31, 1997, the Company had 665 full-time employees, 72 of whom were engaged in sales and marketing, 81 of whom were engaged in management and administration, and the remainder were engaged in production. Hourly production employees of the Company's filtration products business are covered by a collective bargaining agreement, which expires in October 1997. Hourly production employees of the Company's piping system products business in Lebanon, Tennessee are covered by a collective bargaining agreement that expires in March 1998. Most of production employees of the Company's cooling products business are represented by two unions, the Pipefitters and the International Brotherhood of Electrical Workers unions pursuant to collective bargaining agreements that both expire on June 1, 1997. EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth information regarding the executive officers of the Company as of March 31, 1997:
EXECUTIVE OFFICER OF THE COMPANY OR ITS PREDECESSORS AGE POSITION SINCE --- ------------------------------------- ----------------- David Unger 62 Chairman of the Board of Directors, 1972 President and Chief Executive Officer Henry M. Mautner 70 Vice Chairman of the Board of 1972 Directors Gene K. Ogilvie 57 Vice President and Director 1969 Fati A. Elgendy 48 Vice President and Director 1990 Bradley E. Mautner 40 Vice President and Director 1994 Don Gruenberg 54 Vice President and Director 1980 Michael D. Bennett 53 Vice President, Secretary and 1989 Treasurer Billy E. Ervin 51 Vice President 1986 Joseph P. Findley 57 Vice President 1991 J. Tyler Headley 46 Vice President 1973 Robert A. Maffei 49 Vice President 1987 Herbert J. Sturm 46 Vice President 1977
All of the officers serve at the discretion of the Board of Directors. 15 17 David Unger was the President of Midwesco, Inc. from 1972 through January 1994. He has been a director of Midwesco, Inc. since 1972, and served that company in various executive and administrative capacities from 1958 until the consummation of the Thermal Care Merger. Henry M. Mautner served as Chairman of Midwesco, Inc., from 1972, and served that company in various executive and administrative capacities from 1949, until the consummation of the Thermal Care Merger. Since the consummation of the Thermal Care Merger, he has served as the Chairman of the Company formed to succeed to the non-Thermal Care businesses of Midwesco, Inc. Mr. Mautner is the father of Bradley E. Mautner. Gene K. Ogilvie has been employed by the Company and its predecessors in various executive capacities since 1969. He has been general manager of Midwesco Filter or its predecessor since 1980 and President and Chief Operating Officer of Midwesco Filter since 1989. From 1982 until the consummation of the Thermal Care Merger, he served as Vice President of Midwesco, Inc. Fati A.Elgendy became President and Chief Operating Officer of Perma Pipe in March, 1995. Mr. Elgendy served as Vice President, Director of Sales and Marketing for Perma-Pipe from 1990 until March of 1995. He was associated with Midwesco, Inc. from 1978 until the consummation of the Perma-Pipe Merger. Bradley E. Mautner has served as Vice President of the Company since December 1996 and has been a director of the Company since 1995. From 1994 to the consummation of the Thermal Care Merger, he served as President of Midwesco, Inc. In addition, since February 1996, he has served as the Chief Executive Officer of Midwesco Services, Inc. (formerly known as Mid Res, Inc.). From February 1988 to January 1996, he served as the President of Mid Res, Inc. Bradley E. Mautner is the son of Henry M. Mautner. Don Gruenberg has served as Vice President and director of the Company since December 1996. He was employed by Airtemp division of Chrysler Corporation in various positions from 1968 to 1969. From 1970 to 1974, Mr. Gruenberg was employed in various positions by Dunham-Bush Inc. Prior to rejoining Midwesco, Inc. in 1980, he was employed by Thermal Care/Mayer, a division of Midwesco, Inc. from 1974 to 1979. During the intervening period, Mr. Gruenberg served as an independent manufacturer's representative for several product lines in the Midwest region. Mr. Gruenberg is a member of the National Board, Society of the Plastics Industry. Michael D. Bennett has served as the Chief Financial Officer and Vice President of MFRI and its predecessors since August, 1989. Billy E. Ervin has been Vice President, Director of Production of Perma-Pipe since 1986. 16 18 Joseph P. Findley has been Vice President, Manufacturing, of Midwesco Filter since October 1991, having served as Manager, Quality Control and Assurance since January 1989. From 1971 to 1988, he served in various executive capacities for the Menardi-Criswell division of Hosokawa Micron International, Inc. and a predecessor of that division. J. Tyler Headley has been employed by the Company in various executive capacities since 1973 and has served as Vice President, Marketing and Sales of Midwesco Filter since May 1986. Robert A. Maffei has been Vice President, Director of Sales and Marketing of Perma-Pipe since August 1996. He had served as Vice President, Director of Engineering of Perma-Pipe since 1987 and an employee of Midwesco, Inc. from 1986 until the acquisition of Perma-Pipe by MFRI in 1994. Herbert J. Sturm has served the Company since 1975 in various executive capacities including Vice President, Materials and Marketing Services of Midwesco Filter. ITEM 2. PROPERTIES The Company's principal executive offices, and the production facilities for the Company's cooling products business, are located in a 126,000-square foot facility leased by the Company at 7720 Lehigh Avenue, Niles, Illinois 60714. The production facilities for the Company's filtration products, which total 164,500 square feet, are located in buildings situated on approximately fifteen acres owned by the Company in a modern industrial park in Winchester, Virginia. This includes the adjacent facility purchased by the Company in May 1996. The primary production facilities for the Company's piping system products are located on approximately 24 acres of land in a modern industrial park in Lebanon, Tennessee, and are housed in four buildings, which total 120,000 square feet including additions currently under construction and contain manufacturing, warehouse and office facilities. The Company owns the buildings and the land for the Tennessee facility. The Company leases a 22,000-square foot warehouse facility in Niles, Illinois and a 2,600-square foot office and warehouse facility located in Riverside, California. The Company believes its properties and equipment are well maintained, in good operating condition and that their productive capacities will be generally adequate for its present and currently anticipated needs. Compliance with environmental regulations by the Company in its manufacturing operations has not had, and is not anticipated to have, a material effect on the capital expenditures, earnings or competitive position of the Company. ITEM 3. LEGAL PROCEEDINGS Midwesco, Inc., or one of its affiliates, PermAlert ESP, Inc. ("PermAlert") or Perma-Pipe, Inc. ("PPI"), was a party to three lawsuits (the "Pending Suits"), each of which, upon 17 19 consummation of the Thermal Care Merger, became the obligations of MFRI. Pursuant to the merger agreement relating to the Thermal Care Merger, from and after the effective time of the Thermal Care Merger (the "Effective Time"), MFRI will bear all costs and expenses of the Pending Suits, including, but not limited to, any judgments or settlement costs (the "Expenses"); provided, however, after MFRI has spent an aggregate of $400,000 in Expenses, all such Expenses of the Pending Suits will be paid from a special escrow holding 66,890 shares of MFRI common stock (the "Special Escrow"). In the event there are no shares of MFRI common stock in the Special Escrow, the responsibility for the Pending Suits will be solely that of MFRI. Upon the disposition or termination of all of the Pending Suits, any shares in the Special Escrow will be distributed to the shareholders of Midwesco, Inc. as of the Effective Time prorata to their interests in Midwesco, Inc. at the Effective Time. IHP Industrial v. Perm Alert ESP, Case No. 96 CV 068(b), was filed in May 1996, in the Circuit Court of Lauderdale County, Mississippi. It involves a contract which PermAlert entered into with IHP Industrial, Inc. to supply a contained piping system for underground transport of jet fuel at the Air National Guard field in Meridian, Mississippi. The original purchase order for the project was $723,680 and subsequent change orders increased the contract price to $749,207. The plaintiff is seeking damages in excess of $832,537.74, based on claims for breach of warranty, misrepresentation and negligence. PermAlert has filed a counter-claim for $193,884.21, for amounts due under the original contract, including change orders, and for extras involved in the repair of the contained piping system. State Farm Mutual Automobile Ins. Co. v. George Hyman Constr. Co, et al., Case No. 95 L 310, is pending in the Circuit Court of the Eleventh Judicial Circuit, McLean County, Illinois. In July 1996, defendant J.A. House, Inc. ("J.A. House") sued Perma-Pipe in a Third Party Complaint in that litigation. The claim against Perma-Pipe relates to a sub-contract which Perma-Pipe entered with J.A. House, pursuant to which Perma-Pipe agreed to supply a hot water supply and return piping system with leak detection capabilities, for the construction of the State Farm Mutual Automobile Insurance Company complex in Bloomington, Illinois. J.A. House seeks unspecified damages, in an amount in excess of $150,000.00, for breach of contract, breach of warranty, indemnification and negligence, based on its alleged costs in locating and repairing leaks in the return piping system and in its attempt to dry out the system after the leaks were repaired. In May 1993, Midwesco, Inc. and PermAlert filed a complaint against PPG Industries, Inc. ("PPG") and Crain Brothers, Inc. ("Crain") which remains pending in the United States District Court for the Western District of Louisiana entitled, Midwesco, Inc. et al. v. PPG Industries, Inc., et al., Case No. 93 C 1271. This case involves a March, 1991 agreement between PermAlert and PPG for the manufacture and delivery, by PermAlert, of a chlorine pipeline and related services. In turn, PermAlert entered into sub-contracts with Crain and Thermon Manufacturing Co. ("Thermon") for some of the work under its contract with PPG. PermAlert's original contract was for $1,009,683.00. In August 1992, the parties entered into a change order, which increased the contract price by an additional $240,764.00. During the 18 20 course of PermAlert's work, PPG and PermAlert agreed to additional change orders in the amount of $125,887.05. PPG has failed to pay $236,024.78 due under the contract and the change orders. In its amended complaint in the lawsuit, PermAlert seeks: (1) $236,024.78 in compensatory damages from PPG for breach of contract; and (2) punitive damages in excess of $250,000.00 from PPG for fraud. In turn, PPG has filed a counter-claim against PermAlert, alleging that the heat-trace system failed, and seeking damages in the amount of $449,222.00, its alleged costs of repair for the system. In response, PermAlert has also asserted claims in the lawsuit against Thermon, Crain and Keystone Pipeline Services, Inc. ("Keystone"), seeking: (1) a declaration that PermAlert is not obligated to pay Crain the $118,690.61 which Crain has demanded in connection with work it performed for the project; (2) damages in an unspecified amount against Crain and Thermon for negligence; (3) indemnification and contribution from Crain and Thermon, if PermAlert is required to pay any damages to PPG; and (4) damages for negligence and contribution from Keystone, PPG's project supervisor, if PermAlert is required to pay any damages to PPG. 19 21 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS A Special Meeting of Stockholders of the Company was held on December 16, 1996. The only matter voted upon at the special meeting was the Thermal Care Merger. The following table sets forth the results of the vote on such matter:
NUMBER OF SHARES ---------------- For 3,647,198 Against 24,687 Abstain Withheld Broker Non-Votes ------------ TOTAL: 3,671,885
20 22 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded on The Nasdaq National Stock Market under the symbol "MFRI." The following table sets forth, for the periods indicated, the high and low sales prices as reported by the Nasdaq National Market for fiscal 1996 and for fiscal 1997.
FISCAL 1996 HIGH LOW -------------- ---- --- First Quarter . . . . . . . . . . . . . . . $5.38 $4.00 Second Quarter . . . . . . . . . . . . . . 6.00 4.00 Third Quarter . . . . . . . . . . . . . . . 7.13 5.25 Fourth Quarter . . . . . . . . . . . . . . 7.50 5.75 FISCAL 1997 HIGH LOW -------------- ---- --- First Quarter . . . . . . . . . . . . . . . $7.25 $5.75 Second Quarter . . . . . . . . . . . . . . 8.00 6.50 Third Quarter . . . . . . . . . . . . . . . 8.13 6.63 Fourth Quarter . . . . . . . . . . . . . . 8.13 6.88
As of January 31, 1997, there were approximately 150 stockholders of record, and approximately 1,350 beneficial stockholders of the Company's Common Stock. The Company has never declared or paid a cash dividend and does not anticipate paying cash dividends on its common stock in the foreseeable future. Management presently intends to retain all available funds for the development of the business and for use as working capital. Future dividend policy will depend upon the Company's earnings, capital requirements, financial condition and other relevant factors. The Company's line of credit agreement contains certain restrictions on the payment of dividends. The primary restriction limits dividends to a cumulative amount of up to 50% of net income. On October 21, 1996, the shareholders of Midwesco, Inc. approved the Thermal Care Merger by unanimous written consent and on October 25, 1996, the Company and Midwesco, Inc. entered into an Agreement for Merger. On December 30, 1996, shares of the Company's common stock constituting consideration for the Thermal Care Merger (the "Merger Shares") were issued to 20 shareholders of Midwesco, Inc., 14 of whom are "accredited investors" as such term is defined by Rule 501(a) promulgated under the Securities Act of 1933 (the "Securities Act"). The offer and sale of the Merger Shares were effected in reliance upon the exemptions from registration under Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder. 21 23 ITEM 6. SELECTED FINANCIAL DATA The following selected financial data for the Company for the fiscal years ended January 31, 1997, 1996, 1995, 1994 and 1993 are derived from the financial statements of the Company. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included herein in response to Item 7 and the consolidated financial statements and related notes included herein in response to Item 8.
FISCAL YEAR ENDED JANUARY 31, ------------------------------------------------ 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- (In thousands, except per share data) STATEMENTS OF OPERATIONS DATA: Net Sales $93,573 $85,838 $75,495 $29,866 $25,262 Income from operations 6,396 4,738 2,384 2,459 1,755 Net Income 3,230 2,373 1,203 1,534 1,149 Net Income per share 0.70 0.52 0.27 0.54 0.41 FISCAL YEAR ENDED JANUARY 31, ------------------------------------------------ 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- (In thousands) BALANCE SHEET DATA: Total assets $75,328 $58,985 $47,917 $36,898 $12,472 Long-term debt, less current portion 22,627 13,691 6,650 3,100 - Capitalized leases, less current portion 1,294 217 252 147 20
The following table sets forth statements of operations data for the Company's industrial process cooling equipment business. See Notes 4 and 11 to Notes to Financial Statements. This information is not included in the accounts of the Company prior to December 30, 1996 because the Midwesco Merger was not effected until December 30, 1996. Since Thermal Care was a division of Midwesco, Inc. prior to the Midwesco Merger, per share data is not available.
YEAR ENDED JANUARY 31, ------------------------------------------------ 1997 1996 1995 1994 1993 ------- ------- -------------- ------- ------ (In thousands) THERMAL CARE STATEMENTS OF OPERATIONS DATA: Net Sales $20,036 $19,775 $18,528 $13,127 11,640 Income (loss) from continuing operations 661 1,318 1,623 (89) (63) Net Income (loss) 1,161 894 936 128 (420) Net Income (loss) per share NA NA NA NA NA
22 24 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The statements contained under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and certain other information contained in this report, which can be identified by the use of forward-looking terminology such as "may", "will", "expect", "continue", "remains", "intend", "aim", "should", "prospects", "could", "future", "potential", "believes", "plans", and likely" or the negative thereof or other variations thereon or comparable terminology, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbors created thereby. These statements should be considered as subject to the many risks and uncertainties that exist in the Company's operations and business environment. Such risks and uncertainties could cause actual results to differ materially from those projected. These uncertainties include, but are not limited to, economic conditions, market demand and pricing, competitve and cost factors, raw material availability and prices, global interest rates, currency exchange rates, labor relations and other risk factors. FILTRATION PRODUCTS BUSINESS RESULTS OF OPERATIONS The Company's filtration products business is characterized by a large number of relatively small orders and a limited number of large orders, typically from electric utilities. In fiscal 1997, the average order amount was approximately $6,118. The timing of large orders can have a material effect on the comparison of net sales and gross profit from period to period. These large orders generally are highly competitive and result in a lower gross margin. In fiscal 1997, 1996 and 1995, no customer accounted for 10% or more of the net sales of the Company's filtration products and services. The Company's filtration products business, to a large extent, is dependent on government regulation of air pollution at the federal and state levels. The Company believes that continuing growth in the sale of its filtration products and services will be materially dependent on continuing enforcement of environmental laws such as the Clean Air Act Amendments. Although there can be no assurances as to what ultimate effect, if any, the Clean Air Act Amendments will have on the Company's filtration products business, the Company believes that the Clean Air Act Amendments are likely to have a long term positive effect on demand for the Company's filtration products and services. FISCAL 1997 COMPARED WITH FISCAL 1996 Net sales increased 3% from 36,590,000 to $37,563,000 due to higher unit sales across most product lines. 23 25 Gross profit as a percent of net sales increased from 23.9% to 26.3%, primarily due to higher intake margins and a favorable product mix. Selling expense increased from $2,783,000 to $3,265,000 and from 7.6% to 8.7% of net sales. The increase is primarily the result of increased international selling expenses, additional domestic sales and marketing staffing, and higher gross profit-related incentive compensation. General and administrative expenses increased from $1,858,000 to $1,982,000 and from 5.1% to 5.2% of net sales, primarily the result of profit-related incentive compensation. FISCAL 1996 COMPARED WITH FISCAL 1995 Net sales increased 17% from $31,270,000 to $36,590,000, due to higher unit sales of the Company's full line of filtration products. This increase was primarily due to sales of bag-related products and export sales of filter bags. Gross profit as a percent of net sales increased from 21% to 23.9%, primarily due to plant efficiencies from larger production volumes, higher intake margins, and a favorable product mix. Selling expense increased from $2,378,000 to $2,783,000; selling expense as a percent of net sales was unchanged at 7.6%. The dollar increase is primarily attributable to increased international sales efforts and higher gross margin-related incentive compensation. General and administrative expenses increased from $1,641,000 to $1,858,000, primarily the result of profit-related incentive compensation. General and administrative expenses as a percent of net sales decreased from 5.2% to 5.1%. PIPING SYSTEM PRODUCTS BUSINESS RESULTS OF OPERATIONS Generally the Company's leak detection and location systems and secondary containment piping systems have higher profit margins than its district heating and cooling piping systems. However, the Company has been able to improve the margins for its district heating and cooling piping systems by booking orders more selectively. The Company has benefitted from continuing efforts to have its leak detection and location systems and secondary containment piping systems included as part of the customers' original specifications for an increasing number of construction projects. Although demand for the Company's secondary containment piping system products is generally affected by its customers' need to comply with governmental regulations, purchases of such products at times may be delayed by customers due to adverse economic factors. In fiscal 24 26 1997, 1996 and 1995, no customer accounted for 10% or more of net sales of the Company's piping system products. The Company's piping system products business is characterized by a large number of small and medium orders and a small number of large orders. The average order amount for fiscal 1997 was approximately $29,282. The timing of such orders can have a material effect on the comparison of net sales and gross profit from period to period. Most of the Company's piping system products are produced for underground installations and therefore require trenching, which is performed directly for the customer by installation contractors unaffiliated with the Company. Generally, sales of the Company's piping system products tend to be lower during the winter months, due to weather constraints over much of the country. FISCAL 1997 COMPARED WITH FISCAL 1996 Net sales increased 10% from $49,248,000 to $54,194,000, due primarily to a major domestic secondary containment sale booked in fiscal 1996 and essentially completed in fiscal 1997, and to a full year's sales from SZE Hagenuk, which was acquired late in fiscal 1996. Gross profit as a percent of net sales increased from 16.6% to 21.1%, due primarily to favorable product mix, as the increased domestic secondary containment sales and SZE Hagenuk sales carry higher than average gross profit as a percent of net sales. Selling expense increased from $1,802,000 to $2,583,000 and from 3.7% to 4.8% of net sales, due primarily to increased profit-related incentive compensation, increased staffing in the customer service area, and the full year's expenses from SZE Hagenuk purchased in late fiscal 1996. General and administrative expense increased from $3,766,000 to $4,757,000 and from 7.5% of sales to 8.8%. The increase resulted primarily from increased staffing in customer service and the inclusion of SZE Hagenuk for a complete year. Foreign net sales increased from $3,659,000 to $6,207,000 and foreign operating income increased from $206,000 to $589,000, due primarily to the inclusion of a full year's operations of SZE Hagenuk. FISCAL 1996 COMPARED WITH FISCAL 1995 Net sales increased 11% from $44,225,000 to $49,248,000, due primarily to continued high demand for district heating and cooling systems, which is partially due to the full year effect of the September 1994 purchase of Ricwil, compared with only four months in the prior year. 25 27 Gross profit as a percent of net sales increased from 13.6% to 16.6%, due primarily to completion of most of the low margin order backlog acquired from Ricwil in the earlier year and partially to benefits of the factory expansion and related work flow rationalization. Selling expense increased from $1,455,000 to $1,802,000; selling expense as a percent of net sales increased from 3.3% to 3.7%. The dollar increase is primarily attributable to the full year effect of new sales personnel added during the earlier year and due to higher commission expense on higher sales. The percent benefit of spreading higher selling expenses over higher sales was more than offset by additional expenses attributable to new sales personnel. General and administrative expenses increased from $3,186,000 to $3,766,000; general and administrative expenses as a percent of net sales increased from 7.2% to 7.6%. The increases resulted primarily from increased staffing in field services and engineering. Foreign net sales increased from $3,186,000 to $3,659,000, due primarily to the acquisition of SZE Hagenuk in fiscal 1996 and due partially to increased sales in Perma Pipe Services Ltd. Foreign operating income (loss) increased from a loss of $54,000 in fiscal 1995 to a profit of $206,000 in fiscal 1996, due primarily to profit in SZE Hagenuk and a recovery to profitability in Perma Pipe Services Ltd. due to some easing of competitive price pressures. INDUSTRIAL PROCESS COOLING EQUIPMENT BUSINESS RESULTS OF OPERATIONS The Company's cooling products business is characterized by a large number of relatively small orders and a limited number of large orders. In fiscal 1997, the average order amount was approximately $5,886. Generally, OEM sales have lower profit margins than its sales for the domestic and international plastics industries and other markets. Large orders generally are highly competitive and result in lower profit margins. In fiscal 1997, 1996 and 1995, no customer accounted for 10% or more of the Company's cooling products net sales. Although the accounts of the Industrial Process Cooling Equipment business were not included in the accounts of the Company prior to December 30, 1996, the following pro forma information is presented to help the reader understand this business. FISCAL YEAR 1997 COMPARED WITH FISCAL YEAR 1996 Net sales increased 1% from $19,776,000 to $20,036,000. The increase was due primarily to additional OEM portable chiller sales partially offset by lower export sales, as the large fiscal 1996 sale for a plastic bottle making plant in China was not replaced in fiscal 1997. Gross profit as a percent of net sales increased from 22.9% to 29.3% primarily due to classifying commission expenses ($1,506,000 in fiscal 1997) as selling expenses in fiscal 1997 instead of as cost of goods sold as in fiscal 1996, and a more favorable sales product mix. 26 28 Selling expenses increased from $1,206,000 to $2,700,000; selling expenses as a percent of net sales increased from 6.1% to 13.5%. The increase is due primarily to classifying commission expenses ($1,506,000 in fiscal 1997) as selling expenses in fiscal 1997 instead of as cost of goods sold as in fiscal 1996. General and administrative expenses increased from $2,004,000 to $2,514,000 and from 10.1% to 12.5% of net sales, due primarily to increased engineering sales support expenses and to a provision for lawsuits described as follows. Proforma general and administrative expenses for the year ended January 31, 1997 include a provision of $400,000 for the estimated ultimate cost of three lawsuits which had been considered in negotiating the acquisition price of the Thermal Care Merger and which, upon the consummation of the Thermal Care Merger, became the obligations of MFRI. Pursuant to the merger agreement relating to the Thermal Care Merger, should MFRI spend more than an aggregate of $400,000 in costs, expenses, judgements or settlements of such lawsuits, additional amounts will be paid from a special escrow holding 66,890 shares of MFRI common stock, such escrow having been established as a part of the Thermal Care Merger. Management believes that the liability recognized is adequate and that the lawsuits' outcome should not have a material adverse effect on the Company. FISCAL YEAR 1996 COMPARED WITH FISCAL YEAR 1995 Net sales increased 6.7% from $18,528,000 to $19,776,000. The increase is due primarily to sales for new large plants being built in the People's Republic of China producing PET (Polyethylene - Terephthalate) beverage bottles. Gross profit as a percent of net sales decreased from 25.8% to 22.9% primarily due to non-recurring costs associated with a reorganization of the factory work flow and an unfavorable product mix. Selling expenses increased from $819,000 to $1,206,000; selling expenses as a percent of net sales increased from 4.4% to 6.1%. The dollar increase is due primarily to the addition of the California sales office/warehouse, related personnel and advertising promoting the office/warehouse. General and administrative expenses decreased from $2,335,000 to $2,004,000 and from 12.6% of sales to 10.1% of sales, due primarily to a shift in corporate administrative resources from Thermal Care to MFRI during fiscal 1996. GENERAL CORPORATE EXPENSES General corporate expenses include general and administrative expense not allocated to business segments and interest expense. FISCAL YEAR 1997 COMPARED WITH FISCAL YEAR 1996 General and administrative expenses not allocated to business segments increased from $1,933,000 to $2,389,000, due primarily to increased profit-based incentive compensation, expenses of upgrading the Company's computer hardware and software, and higher adminbistrative, financial management and accounting salaries expense. The increased administrative, financial management and accounting salaries expenses reflect shifts in time devoted to corporate administrative matters from other areas, with some offsetting decrease in Perma-Pipe administrative expense. The December 30, 1996 acquisition of Midwesco had a minimal effect on general corporate expenses. 27 29 Interest expense increased from $925,000 to $992,000 due primarily to higher borrowings to finance working capital, fixed asset acquisitions, the acquisiiton of SZE Hagenuk, and the purchase of real estate to provide for the expansion of Midwesco Filter in Winchester, Virginia. See liquidity and capital resources for description of steps which have been taken to lower and stabilize the Company's cost of money. FISCAL YEAR 1996 COMPARED WITH FISCAL YEAR 1995 General and administrative expenses not allocated to business segments increased to $1,933,000 from $1,553,000, due primarily to expenses of upgrading the Company's computer hardware and software systems, profit-based incentive compensation, and volume-related expenses of credit and collections. Interest expense of $925,000 in fiscal 1996 represented the cost of borrowing under the Company's line of credit and term loan, obtained at the time of the acquisitions of Perma-Pipe on January 28, 1994 and Ricwil on September 30, 1994, respectively, and under Industrial Revenue Bonds issued during the third quarter of fiscal 1995. LIQUIDITY AND CAPITAL RESOURCES To finance a September 1994 acquisition of Ricwil, the Company borrowed $4,000,000 from a bank under a term loan which is repayable in 16 consecutive quarterly installments which commenced January 31, 1995. On September 14, 1995 and October 18, 1995, respectively, Midwesco Filter and Perma-Pipe received the proceeds of Industrial Revenue Bonds. Such proceeds are available for capital expenditures related to manufacturing capacity expansions and efficiency improvements during a three-year period commencing in the fourth quarter of 1994 in the Filtration Products Business in Winchester, Virginia ($3,150,000) and the Piping System Products Business in Lebanon, Tennessee ($3,150,000). The bonds mature approximately 12 years from the date of issuance, but the Company's agreement with the bank whose letter of credit secures payment of the bonds requires equal annual principal reductions sufficient to amortize the bonds in full beginning approximately four years after issuance. The bonds bear interest at a variable rate, which initially approximated 5% per annum, including letter of credit and remarketing fees. Each bond indenture establishes a trusteed project fund for deposit of the bond proceeds. The trustee is authorized to make disbursements from the project fund upon requisition from the Company to pay costs of capital expenditures which comply with the requirements of the loan agreement for each bond. Pending such disbursements, the trustee invests the balance of the project fund in investments defined by the indenture and limited by applicable law. Such invested funds totaled $3,880,000 at January 31, 1997. The bonds are secured by bank letters of credit which expire approximately two years from the date of issuance; the Company expects to arrange for renewal, reissuance or extension of the letter of credit prior to each expiration date during the term of the bonds. 28 30 On May 8, 1996, the Company purchased for approximately $1.1 million a 10.3-acre parcel of land with a 67,000-square foot building adjacent to its filtration products property in Winchester, Virginia to accommodate the Company's growing activities. The purchase was financed 80% by a seven-year mortgage bearing interest at 8.38% and 20% by the aforementioned revenue bonds. The Company has positive working capital of $27.9 million and a current ratio of 2.6 to 1. Working capital and investment needs of the Company have historically been funded through the Company's operations and a revolving line of credit. The Company assumed approximately $6,611,000 of Midwesco, Inc. long-term debt in the Midwesco Merger, $5,000,000 of which represented assumed bank and other debt, with the remainder representing assumed capitalized lease obligations. Effective December 15, 1996, the Company replaced its revolving line of credit and the unpaid portion of the $4,000,000 September 1994 term loan with $15 million of fixed rate senior unsecured notes due 2007 (the "Notes") and a new $5 million floating rate unsecured revolving line of credit (the "Credit Line"). Proceeds of the Notes were also used to repay the Midwesco, Inc. debt assumed by the Company. The Notes bear interest at an annual rate of 7.21% and require principal payment beginning in the year ended January 31, 2001, and continuing annually thereafter, resulting in a seven-year average life. No amounts were outstanding under the Credit Line as of January 31, 1997. At January 31, 1997 the Company had contracted for a substantial portion of an estimated $650,000 capacity expansion project at its Lebanon, Tennessee piping systems manufacturing facility, to be primarily financed from the proceeds of the Tennessee Industrial Revenue Bonds. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of the Company as of January 31, 1997 and January 31, 1996 and for each of the three years in the period ended January 31, 1997 and the notes thereto are set forth elsewhere herein. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information with respect to directors of the Company is incorporated herein by reference to the table under the caption "Nominees For Election as Directors" and the textual paragraphs 29 31 following the aforesaid table in the Company's proxy statement for the 1997 annual meeting of stockholders. Information with respect to executive officers of the Company is included in Item 1, Part I hereof under the caption "Executive Officers of the Registrant." ITEM 11. EXECUTIVE COMPENSATION Information with respect to executive compensation is incorporated herein by reference to the information under the caption "Executive Compensation" in the Company's proxy statement for the 1997 annual meeting of stockholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information with respect to security ownership of certain beneficial owners and management of the Company is incorporated herein by reference to the information under the caption "Beneficial Ownership of Common Stock" in the Company's proxy statement for the 1997 annual meeting of stockholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information with respect to certain relationships and transactions is incorporated herein by reference to the information under the caption "Certain Transactions" in the Company's proxy statement for the 1997 annual meeting of stockholders. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K a. (1) Consolidated Financial Statements Refer to Part II, Item 8 of this report. (2) Financial Statement Schedule a. Schedule II - Valuation and Qualifying Accounts (3) The exhibits, as listed in the Exhibit Index set forth on pages E-1 and E-2, are submitted as a separate section of this report. b. During the last quarter of the fiscal year ended January 31, 1997, the Company filed a Current Report on Form 8-K dated December 30, 1996. The Items Nos. 1, 2 and 7 were reported on in such report. Midwesco, Inc. and Subsidiaries 30 32 Consolidated Financial Statements and Unaudited Pro Forma Combined Financial Statements were included in such report. c. See Item 14(a)(3) above. d. The response to this portion of Item 14 is submitted as a separate section of this report. 31 33 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of MFRI, Inc. and subsidiaries: We have audited the accompanying consolidated balance sheets of MFRI, Inc. and subsidiaries as of January 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended January 31, 1997. Our audits also included the financial statement schedule listed in the Index at Item 14(a)(2). These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects the financial position of MFRI, Inc. and subsidiaries as of January 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Chicago, Illinois April 18, 1997 34 MFRI, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Year Ended January 31, 1997 1996 1995 - ----------------------------------------------------------------------------------------------- Net sales $93,573,000 $85,838,000 $75,495,000 Cost of sales 71,768,000 68,958,000 62,898,000 - ----------------------------------------------------------------------------------------------- Gross Profit 21,805,000 16,880,000 12,597,000 Operating expenses: Selling expense 6,104,000 4,585,000 3,832,000 General and administrative expense 8,740,000 6,993,000 6,025,000 Management services agreement - net 565,000 564,000 356,000 - ----------------------------------------------------------------------------------------------- Total Operating Expenses 15,409,000 12,142,000 10,213,000 - ----------------------------------------------------------------------------------------------- Income from Operations 6,396,000 4,738,000 2,384,000 Interest expense - net 992,000 925,000 496,000 - ----------------------------------------------------------------------------------------------- Income Before Income Taxes 5,404,000 3,813,000 1,888,000 Income taxes 2,174,000 1,440,000 685,000 - ----------------------------------------------------------------------------------------------- Net Income $3,230,000 $2,373,000 $1,203,000 - ----------------------------------------------------------------------------------------------- Net income per common share $0.70 $0.52 $0.27 Weighted Average Common and Common Share Equivalents Outstanding 4,627,000 4,543,000 4,493,000
See notes to consolidated financial statements 35 MFRI, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF JANUARY 31,
ASSETS 1997 1996 CURRENT ASSETS: Cash and cash equivalents $ 3,416,000 $ 449,000 Trade accounts receivable (net of allowance for doubtful accounts: 1997 - $270,000; 1996 - $199,000) 18,759,000 16,137,000 Accounts receivable - related companies 157,000 165,000 Costs and estimated earnings in excess of billings on uncompleted contracts 2,807,000 4,032,000 Income taxes receivable 186,000 363,000 Inventories 17,244,000 13,205,000 Deferred income taxes 2,193,000 1,733,000 Prepaid expenses and other current assets 487,000 781,000 - ---------------------------------------------------------------------------------------------- Total Current Assets 45,249,000 36,865,000 - ---------------------------------------------------------------------------------------------- RESTRICTED CASH FROM BOND PROCEEDS 3,880,000 5,046,000 PROPERTY, PLANT AND EQUIPMENT: Land, buildings and improvements 6,846,000 3,353,000 Machinery and equipment 9,237,000 7,532,000 Furniture and office equipment 2,919,000 2,051,000 Transportation equipment 1,147,000 700,000 - ---------------------------------------------------------------------------------------------- 20,149,000 13,636,000 Less accumulated depreciation and amortization 5,095,000 3,752,000 - ---------------------------------------------------------------------------------------------- Property, Plant and Equipment - Net 15,054,000 9,884,000 - ---------------------------------------------------------------------------------------------- OTHER ASSETS: Patents (net of accumulated amortization) 1,128,000 1,237,000 Goodwill (net of accumulated amortization) 8,120,000 4,733,000 Other assets 1,897,000 1,220,000 - ---------------------------------------------------------------------------------------------- Total Other Assets 11,145,000 7,190,000 - ---------------------------------------------------------------------------------------------- Total Assets $75,328,000 $58,985,000 ==============================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996 CURRENT LIABILITIES: Drafts payable $1,598,000 $2,209,000 Accounts payable: Trade 6,261,000 4,807,000 Related companies 16,000 183,000 Accrued compensation and payroll taxes 1,579,000 939,000 Other accrued liabilities 1,128,000 1,020,000 Commissions payable 6,049,000 4,509,000 Current maturities of long-term debt 564,000 3,031,000 Billings in excess of costs and estimated earnings on uncompleted contracts 210,000 490,000 - -------------------------------------------------------------------------------------------------- Total Current Liabilities 17,405,000 17,188,000 - -------------------------------------------------------------------------------------------------- Long-term debt, less current maturities 23,921,000 14,267,000 Deferred income taxes and other 1,148,000 1,307,000 - -------------------------------------------------------------------------------------------------- Total Long-Term Liabilities 25,069,000 15,574,000 - -------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY: Common stock, $.01 par value, authorized 15,000,000 shares; Issued and outstanding: 1997 - 4,962,000 : 1996 - 4,524,000 50,000 45,000 Additional paid-in capital 21,384,000 17,967,000 Retained earnings 11,478,000 8,248,000 Accumulated translation adjustment (58,000) (37,000) - -------------------------------------------------------------------------------------------------- Total Stockholders' Equity 32,854,000 26,223,000 - -------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $75,328,000 $58,985,000 ==================================================================================================
See notes to consolidated financial statements 36 MFRI, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL RETURNABLE ACCUMULATED ------------------ PAID-IN SHARES HELD RETAINED TRANSLATION TOTAL SHARES AMOUNT CAPITAL IN ESCROW EARNINGS ADJUSTMENT - ------------------------------------------------------------------------------------------------------------------------------------ Balance, February 1, 1994 4,289,000 $43,000 $16,439,000 $4,672,000 $21,154,000 Net income 1,203,000 1,203,000 Shares issued in connection with the: Acquisition of Ricwil, Inc. 185,000 2,000 1,298,000 1,300,000 Public stock offering 180,000 2,000 1,139,000 1,141,000 Shares returnable from escrow pursuant to Ricwil purchase agreement (125,000) (877,000) (877,000) Unrealized translation adjustment 19,000 19,000 - ------------------------------------------------------------------------------------------------------------------------------------ Balance, January 31, 1995 4,529,000 47,000 18,876,000 (877,000) 5,875,000 19,000 23,940,000 Net income 2,373,000 2,373,000 Shares returned from escrow due to Ricwil settlement (5,000) (2,000) (909,000) 877,000 (34,000) Unrealized translation adjustment (56,000) (56,000) - ------------------------------------------------------------------------------------------------------------------------------------ Balance, January 31, 1996 4,524,000 45,000 17,967,000 8,248,000 (37,000) 26,223,000 Net income 3,230,000 3,230,000 Shares issued in connection with the acquisition of Eurotech 31,000 214,000 214,000 Shares issued in connection with the acquisition of Midwesco 2,124,000 22,000 16,718,000 16,740,000 Shares held by Midwesco retired at time of Midwesco acquisition (1,718,000) (17,000) (13,518,000) (13,535,000) Stock options exercised 1,000 3,000 3,000 Unrealized translation adjustment (21,000) (21,000) - ------------------------------------------------------------------------------------------------------------------------------------ Balance, January 31, 1997 4,962,000 $50,000 $21,384,000 $11,478,000 ($58,000) $32,854,000 ====================================================================================================================================
See notes to consolidated financial statements 37 MFRI, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEAR ENDED JANUARY 31, 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net income $3,230,000 $2,373,000 $1,203,000 Adjustments to reconcile net income to net cash flows from operating activities: Provision for depreciation and amortization 1,810,000 1,335,000 902,000 Deferred income taxes (189,000) 52,000 (266,000) Foreign currency translation adjustment (21,000) (56,000) 19,000 Change in operating assets and liabilities, net of effects of purchased businesses: Accounts receivable (463,000) (1,010,000) (1,416,000) Income taxes receivable 177,000 (265,000) (23,000) Inventories 64,000 (1,774,000) (161,000) Prepaid expenses and other assets 512,000 (1,151,000) (1,405,000) Accounts payable (1,417,000) (766,000) (990,000) Compensation and payroll taxes 461,000 127,000 143,000 Other accrued liabilities 537,000 (4,000) (1,428,000) --------------------------------------------------------------------------------------------------------- Net Cash Flows from Operating Activities 4,701,000 (1,139,000) (3,422,000) --------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities: Change in restricted cash from Industrial Revenue Bonds 1,166,000 (5,046,000) Acquisition of businesses, net of cash acquired (211,000) (690,000) (860,000) Purchase of property and equipment (2,726,000) (2,259,000) (1,836,000) --------------------------------------------------------------------------------------------------------- Net Cash Flows from Investing Activities (1,771,000) (7,995,000) (2,696,000) --------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities: Net payments on capitalized lease obligations (295,000) (151,000) (129,000) Proceeds from issuance of Industrial Revenue Bonds 6,300,000 Borrowings under revolving, term, and mortgage loans 38,242,000 18,500,000 17,049,000 Repayment of bank debt and accrued interest (37,913,000) (15,550,000) (12,450,000) Stock options exercised 3,000 Net proceeds from public offering of common stock 1,141,000 --------------------------------------------------------------------------------------------------------- Net Cash Flows from Financing Activities 37,000 9,099,000 5,611,000 --------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 2,967,000 (35,000) (507,000) Cash and Cash Equivalents at Beginning of Year 449,000 484,000 991,000 --------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End ofYear $3,416,000 $449,000 $484,000 =========================================================================================================
See notes to consolidated financial statements 38 MFRI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JANUARY 31, 1997, 1996 AND 1995 NOTE 1 -- BASIS OF PRESENTATION MFRI, Inc. ("MFRI") was incorporated on October 12, 1993, and on January 28, 1994 became successor by merger to Midwesco Filter Resources, Inc. ("Midwesco Filter"), and acquired on that date all of the assets of the Perma-Pipe division of Midwesco, Inc. ("Perma-Pipe"), subject to specified liabilities, in exchange for cash and stock of MFRI. On December 30, 1996 MFRI acquired, through the merger of Midwesco, Inc. ("Midwesco") into MFRI, all of the assets of Midwesco's Thermal Care business ("Thermal Care") subject to specified liabilities including all liabilities relating to three lawsuits arising from warranty obligations relating to Perma-Pipe, Midwesco's rights under leases (primarily its Niles, Illinois lease of the building that serves as the principal offices of MFRI and Midwesco and as the manufacturing facility of Thermal Care), the deferred tax assets of Midwesco, and 1,718,000 shares of the common stock of MFRI owned by Midwesco. Midwesco was owned primarily by certain management stockholders of MFRI and their families. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements of MFRI include the consolidated accounts of MFRI and its wholly-owned subsidiaries Midwesco Filter and Perma-Pipe and Perma-Pipe's subsidiaries, Perma-Pipe Services, Ltd. ("PPSL"), Ricwil Piping Systems Company ("Ricwil") (subsequent to September 30, 1994), and SZE Hagenuk GmbH of Hamburg,Germany ("SZE Hagenuk") (subsequent to December 6, 1995) (collectively the "Company"). All significant intercompany balances and transactions have been eliminated. NATURE OF BUSINESS: Midwesco Filter is engaged principally in the manufacture and sale of filter bags for use in industrial air pollution control systems known as "baghouses". Baghouses are used in a wide variety of industries in the United States and abroad to limit particulate emissions, primarily to comply with environmental regulations. Perma-Pipe and its subsidiaries are engaged in the engineering, designing and manufacturing of specialty piping systems and leak detection and location systems. Thermal Care is engaged in the engineering, designing and manufacturing of industrial process cooling equipment, including chillers, cooling towers, pump and tank assemblies, temperature controllers, and water treatment equipment. NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES REVENUE RECOGNITION: Midwesco Filter, SZE Hagenuk and Thermal Care recognize revenues at the date of shipment. Perma-Pipe and its subsidiaries, Ricwil and PPSL, recognize revenues on contracts under the "percentage of completion" method. The percentage of completion is determined by the relationship of costs incurred to the total estimated costs of the contract. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions and final contract settlements may result 39 in revisions to costs and income and are recognized in the period in which the revisions are determined. Claims for additional compensation due the Company are recognized in contract revenues when realization is probable and the amount can be reliably estimated. USE OF ESTIMATES: The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. OPERATING CYCLE: The length of Perma-Pipe and PPSL contracts vary, but are typically less than one year. The Company includes in current assets and liabilities amounts realizable and payable in the normal course of contract completion unless completion of such contracts extends significantly beyond one year. CASH EQUIVALENTS: All highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents. INVENTORIES: Inventories are stated at the lower of cost or market. Cost of inventories is determined using the first-in, first-out method for substantially all inventories. Inventories consist of the following:
January 31, 1997 1996 ------------------------ Raw materials $12,443,000 $10,265,000 Work in process 2,011,000 960,000 Finished goods 2,790,000 1,980,000 ----------- ----------- Total $17,244,000 $13,205,000 =========== ===========
LONG-LIVED ASSETS: Property, plant and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which range from three to 30 years. Amortization of assets under capital leases is included in depreciation and amortization. Goodwill reflected in the consolidated financial statements relates to the Company's fiscal 1994 acquisition of Perma-Pipe, its fiscal 1995 acquisition of Ricwil, and its fiscal 1997 acquisition of Midwesco. The Company amortizes goodwill on the straight-line basis over 40 years for the Perma-Pipe and Ricwil acquisitions and 25 years for the Midwesco acquisition. Patents are capitalized and amortized on the straight-line basis over a period not to exceed the legal lives of the patents. In fiscal 1997, the company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The statement requires the recognition of an impairment loss for an asset held for use when the estimate of undiscounted 40 future cash flows expected to be generated by the asset is less than its carrying amount. Measurement of the impairment loss is based on fair value of the asset. Generally, fair value will be determined using valuation techniques such as the present value of expected future cash flows. It was the company's past policy to measure an impairment loss for assets held for use based on expected undiscounted future cash flows. Adoption of this statement will result in recognition of a larger loss, based on discounted future cash flows, in the year of impairment and lower depreciation charges over the remaining life of the asset. Since adoption, no impairment losses have been recognized. The recognition and measurement of impairment losses for long-lived assets to be disposed of under SFAS No. 121 is consistent with the company's past practice. FOREIGN CURRENCY: The balance sheet accounts of PPSL and SZE Hagenuk are translated into United States dollars at the balance sheet date exchange rate and statement of operation items are translated at the average exchange rate for the year; resulting balance sheet translation adjustments are reflected as a separate component of stockholders' equity. PPSL generates and expends cash in the functional currency of the United Kingdom. SZE Hagenuk's functional currency is that of the Federal Republic of Germany. NET INCOME PER COMMON SHARE: Net income per common share is computed by dividing net income by the weighted average number of common shares outstanding, including common stock equivalents which consist of stock options and stock purchase warrants. FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying value of cash and cash equivalents, accounts receivable, restricted cash and accounts payable are reasonable estimates of their fair value due to their short-term nature. The carrying values of long-term obligations are a reasonable estimate of their fair values as the interest rates approximate rates currently available to the Company for debt with similar terms and remaining maturities. RECLASSIFICATIONS: Certain previously reported amounts have been reclassified to conform with the current period presentation. STOCK OPTIONS: The Company follows Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), and related interpretations, in accounting for its employee stock options. Under APB 25, because the exercise price of the stock option equals the market price of the underlying stock on the issuance date, no compensation expense is recognized. Pro forma net income and net income per share is presented in the stock option note as if the alternative fair value method of acccounting provided for under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), had been applied to options granted after January 31, 1995. NOTE 3 -- RELATED PARTY TRANSACTIONS Prior to the Company's acqusition of Midwesco, Midwesco provided certain services and facilities to the Company and the Company provided certain services to Midwesco. Such services and facilities have been provided under management services agreements approved by the Company's Independent Directors (Note 13). Pursuant to such agreements, the Company reimbursed Midwesco $600,000, $564,000 and $381,000 during the 41 years ended January 31, 1997, 1996 and 1995, respectively and Midwesco reimbursed the Company $35,000, $0 and $25,000 during the years ended January 31, 1997, 1996 and 1995, respectively. Management of the Company believes the amounts paid and received under these agreements were comparable to those which would have been paid and received under arms-length transactions. NOTE 4 -- ACQUISITIONS THERMAL CARE On December 30, 1996, MFRI acquired, through merger of Midwesco into MFRI, the Thermal Care business of Midwesco, for 406,000 shares of the Company's stock (net of 1,718,000 shares previously owned by Midwesco and canceled in the merger), valued at $7.88 per share or $3,204,000. The acquisition has been accounted for as a purchase and the accounts of Thermal Care have been included in the consolidated financial statements since the date of acquisition, including income from operations ($137,000 - see Note 11), net income ($84,000) and net income per common share ($.02). The purchase price was allocated to the assets and liabilities acquired, based on their estimated fair values. The excess ($3,094,000) of the purchase price over the fair value of net assets acquired has been recorded as goodwill and is being amortized over a 25 year period on the straight line basis. The following represents the unaudited proforma results of operations as if the acquisition of Thermal Care had occurred on February 1, 1995. Included in the proforma results for the year ended January 31, 1997 is a proforma pretax provision of $400,000 (after tax $244,000) or $.05 per share for the estimated ultimate cost of three lawsuits which had been considered in negotiating the acquisition price of the Thermal Care Merger and which, upon the consummation of the Thermal Care Merger, became the obligations of MFRI. Pursuant to the agreement relating to the Thermal Care Merger, should MFRI spend more than an aggregate of $400,000 in costs, expenses, judgements or settlements of such lawsuits, additional amounts will be paid from a special escrow holding 66,890 shares of MFRI common stock, such escrow having been established as a part of the Thermal Care Merger. Management believes that the liability recognized is adequate and that the lawsuits' outcome should not have a material adverse effect on the Company. Year Ended January 31, 1997 1996 --------------------------------- Net sales $111,793,000 $105,613,000 Income after taxes before proforma lawsuit provision 3,604,000 2,676,000 Income after taxes per common share before proforma lawsuit provision .72 .54 Net Income 3,362,000 2,676,000 Net income per common share .67 .54 Weighted average common shares outstanding 4,997,000 4,949,000 SZE HAGENUK On December 6, 1995, Perma-Pipe acquired for $690,000 cash the net assets of the leak detection operations of SZE Hagenuk. The acquisition has been accounted for as a purchase and the accounts of SZE Hagenuk have been included in the consolidated financial statements since the date of acquisition. RICWIL On September 30, 1994, MFRI and a subsidiary acquired substantially all of the assets, net of specified assumed liabilities, of Ricwil. The purchase price consisted of $860,000 and up to 185,000 shares of MFRI common stock valued at $1,300,000. The shares of common stock were issued at closing and held in escrow subject to final determination of the purchase price. In the years ended January 31, 1995 and 1996 final settlements regarding the purchase price were reached, resulting in the return of 130,000 shares of common stock to the Company. 42 The acquisition was accounted as a purchase and the accounts of Ricwil have been included in the consolidated financial statements since the date of acquisition. The purchase price was allocated to the assets and liabilities acquired, based on their estimated fair values. The excess ($2,835,000) of the purchase price over the fair value of net assets acquired has been recorded as goodwill and is being amortized over a 40 year period on the straight-line basis. NOTE 5 -- RETENTION RECEIVABLE Retention of $1,068,000 and $545,000 at January 31, 1997 and 1996, respectively, is included in the balance of trade accounts receivable. NOTE 6 -- COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS Costs and estimated earnings on uncompleted contracts at January 31 are as follows: 1997 1996 ----------- ----------- Costs incurred on uncompleted contracts $16,902,000 $15,132,000 Estimated earnings 4,201,000 3,203,000 Earned revenue 21,103,000 18,335,000 ----------- ----------- Less billings to date 18,506,000 14,793,000 ----------- ----------- Total $ 2,597,000 $ 3,542,000 =========== =========== Classified as follows: Costs and estimated earnings in excess of billings on uncompleted contracts $ 2,807,000 $ 4,032,000 Billings in excess of costs and estimated earnings on uncompleted contracts (210,000) (490,000) ----------- ----------- Total $ 2,597,000 $ 3,542,000 =========== =========== NOTE 7 -- DEBT Long-term debt at January 31 consists of the following: 1997 1996 ------------------------ 7.21% Unsecured senior notes due 2007 $15,000,000 $ - Term bank loan 2,750,000 Revolving bank loan 67,000 7,750,000 Mortgage note and other 862,000 100,000 Industrial Revenue Bonds 6,300,000 6,300,000 Capitalized lease obligations (Note 8) 2,256,000 389,000 ----------- ----------- 24,485,000 17,298,000 Less current maturities 564,000 3,031,000 ----------- ----------- Total $23,921,000 $14,267,000 =========== =========== 43 The Company issued $15,000,000 of 7.21% unsecured senior notes due January 31, 2007 to institutional investors. $10,000,000 was received on December 20, 1996 and $5,000,000 on January 22, 1997. Level principal repayments are to be made beginning January 31, 2001. Earlier principal payments can be made at the Company's option. There are certain financial covenants to be met as long as the notes are outstanding. At January 31, 1997, the Company was in compliance with these covenants. On December 19, 1996 the Company obtained a $5,000,000 revolving line of credit maturing on March 31, 2000 and bearing interest, at the Company's option, at either the prime rate (8.25% at January 31, 1997) or at the LIBOR rate for the term of the loan plus a margin (1.50% at January 31, 1997) redetermined each quarter based upon Company's interest coverage ratio. The loan agreement includes certain financial covenants and is unsecured. At January 31, 1997, the Company was in compliance with these covenants. On May 8, 1996, the Company purchased for approximately $1.1 million a 10.3-acre parcel of land with a 67,000-square foot building adjacent to its Midwesco Filter property in Winchester, Virginia. The purchase was financed 80% by a seven-year mortgage bearing interest at 8.38% and 20% by the industrial revenue bonds described below. On September 14, 1995, and October 18, 1995, respectively, Midwesco Filter and Perma-Pipe issued Industrial Revenue Bonds, the proceeds of which are available for capital expenditures related to manufacturing capacity expansions and efficiency improvements during a three-year period commencing in the fourth quarter of 1994 for Midwesco Filter in Winchester, Virginia ($3,150,000) and Perma-Pipe in Lebanon, Tennessee ($3,150,000). While the bonds mature twelve years from the date of issuance, the Company's agreement with a Trustee Bank requires equal annual principal reductions sufficient to amortize the bonds in full, beginning approximately four years after issuance. The bonds bear interest at a variable rate, which approximated 5% at January 31, 1997, including letters of credit and remarketing fees. Each bond indenture established a trusteed project fund for deposit of the bond proceeds. The trustee is authorized to make disbursements from the project fund upon requisition from the Company to pay costs of capital expenditures which comply with the requirements of the loan agreements. Pending such disbursements, the trustee invests the balance of the project fund in investments defined by the indenture and limited by applicable law. Such invested funds totaled $3,880,000 at January 31, 1997 and $5,046,000 at January 31, 1996. The bonds are fully secured by bank letters of credit which expire approximately two years from issuance; the Company expects to arrange for renewal, reissuance or extension of the letters of credit prior to expiration. Maturities of long-term debt in each of the next five years are as follows: 1998 - $564,000; 1999 - $398,000; 2000 - $196,000; 2001 - $2,271,000; 2002 - $2,292,000; thereafter $18,782,000. 44 NOTE 8 -- LEASE INFORMATION The following is an analysis of property under capitalized leases: 1997 1996 ----------------------- Building and improvements $1,594,000 $ - Machinery and equipment 431,000 Furniture, fixtures and office equipment 310,000 149,000 Transportation equipment 1,294,000 578,000 ---------- -------- 3,629,000 727,000 Less accumulated amortization (1,963,000) (351,000) ---------- -------- $1,666,000 $376,000 ========== ======== The Company's lease for the building and improvements is with a partnership which is owned by certain management stockholders of MFRI; the lease expires in December, 2007. The future minimum lease payments under the capitalized leases are as follows: 1998 $ 749,000 1999 606,000 2000 370,000 2001 283,000 2002 283,000 Thereafter 1,351,000 ---------- 3,642,000 Less amount representing interest 1,386,000 ---------- Present value of future minimum lease payments (Note 7) $2,256,000 ========== NOTE 9 -- INCOME TAXES The following is a summary of domestic and foreign income before income taxes: Domestic $5,087,000 Foreign 317,000 ---------- $5,404,000 ========== Components of income tax expense are as follows: Year Ended January 31, 1997 1996 1995 ---------- ---------- --------- Current: Federal $1,835,000 $1,270,000 $926,000 Foreign 218,000 30,000 (14,000) State and other 310,000 192,000 39,000 ---------- ---------- -------- 2,363,000 1,492,000 951,000 Deferred (189,000) (52,000) (266,000) ---------- ---------- -------- Total $2,174,000 $1,440,000 $685,000 ========== ========== ======== 45 The difference between the provision for income taxes and the amount computed by applying the federal statutory rate is as follows: Year Ended January 31, 1997 1996 1995 --------------------------------- Tax at federal statutory rate $1,837,000 $1,296,000 $642,000 Foreign rate tax differential 86,000 State taxes, net of federal benefit 258,000 162,000 17,000 Other - net (7,000) (18,000) 26,000 ---------- ---------- -------- Total $2,174,000 $1,440,000 $685,000 ========== ========== ======== Components of the deferred income tax asset balance as of January 31, 1997 and 1996 are as follows: 1997 1996 ------------------------- Accrued commissions $1,397,000 $1,194,000 Allowance for doubtful accounts 67,000 53,000 Inventory valuation allowance 92,000 85,000 Vacation accruals 139,000 100,000 Insurance accruals 142,000 69,000 Inventory uniform capitalization 89,000 28,000 Sales reserve 158,000 128,000 Other 109,000 76,000 ----------- ------------ Total $2,193,000 $1,733,000 =========== ============ Components of the deferred income tax liability balance as of January 31, 1997 and 1996 are as follows: 1997 1996 ---------------------- Depreciation $ 946,000 $ 844,000 Foreign acquisition adjustments 106,000 240,000 Other 7,000 127,000 ---------- ---------- Total $1,059,000 $1,211,000 ========== ========== 46 NOTE 10 -- EMPLOYEE RETIREMENT PLANS PENSION PLAN Midwesco Filter has a defined benefit plan covering its hourly rated employees. The benefits are based on fixed amounts multiplied by years of service of retired participants. The funding policy is to contribute such amounts as are necessary to provide for benefits attributed to service to date and those expected to be earned in the future. The amounts contributed to the plan are sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974. Midwesco Filter may contribute additional amounts at its discretion. The following table sets forth the plan's funded status and amounts recognized in the Company's consolidated balance sheet at January 31, 1997 and 1996: 1997 1996 ------------------------ Actuarial present value of: Vested benefit obligation $ 758,000 $698,000 =========== ========== Accumulated benefit obligation $ 782,000 $719,000 =========== ========== Projected benefit obligation $ 782,000 $746,000 Plan assets at fair value 1,004,000 698,000 ----------- ---------- Projected benefit obligation in excess of plan assets 222,000 (48,000) Unrecognized net transition obligation 4,000 5,000 Unrecognized prior service cost 104,000 112,000 Unrecognized net (gain) loss (278,000) (77,000) ----------- ---------- PREPAID (ACCRUED) PENSION COST $ 52,000 ($8,000) =========== ========== Net periodic pension expense for 1997, 1996 and 1995 includes the following components: 1997 1996 1995 --------------------------------- Service cost - benefits earned during the year $39,000 $32,000 $28,000 Interest cost on projected benefit obligation 53,000 48,000 39,000 Actual return on plan assets (224,000) (239,000) 39,000 Net amortization and deferral 172,000 212,000 (75,000) ---------- ---------- --------- NET PENSION EXPENSE $40,000 $53,000 $31,000 ========== ========== ========= Assumptions used in accounting for pension costs at January 31, 1997, 1996 and 1995, were: discount rate of 7.50%, 7.25%, and 7.5%, respectively, and a rate of return on plan assets of 8.0% for each year. Approximately 91% and 68% of the plan assets at January 31, 1997 and 1996, are invested in corporate common stocks and bonds, with the remainder invested in money market and mutual funds. 47 401(K) PLAN The employees of the Company participate in the MFRI, Inc. Employee Savings and Protection Plan, which is applicable to all employees except certain employees who are covered by collective bargaining agreement benefits. The plan allows employee pretax payroll contributions up to 16% of total compensation. Prior to February 1, 1995, the Company made contributions to this 401(K) Plan in an amount equal to 25% of each participant's contribution, up to a maximum of 1% of their salaries. Beginning February 1, 1995, the Company contribution was increased to 50% of each participant's contribution, up to a maximum of 2% of their salaries. Contributions to the 401(K) Plan and its predecessors were $194,000, $180,000 and $133,000 for the years ended January 31, 1997, 1996 and 1995, respectively. NOTE 11 -- BUSINESS SEGMENT INFORMATION The Company has three business segments; the filtration product business, the piping systems product business and the industrial process cooling equipment business. The industrial process cooling business equipment segment was established with the acquisition of Midwesco in December, 1996. Intersegment sales are not material. The following is information relevant to the Company's business segments: SEGMENT INFORMATION: 1997 1996 1995 ----------------------------------- SALES: Filtration products $37,563,000 $36,590,000 $31,270,000 Piping system products 54,194,000 49,248,000 44,225,000 Industrial process cooling equipment 1,816,000 ----------- ----------- ----------- TOTAL SALES $93,573,000 $85,838,000 $75,495,000 =========== =========== =========== INCOME FROM OPERATIONS: Filtration products $ 4,615,000 $ 4,086,000 $ 2,554,000 Piping system products 4,033,000 2,585,000 1,383,000 Industrial process cooling equipment 137,000 Corporate (2,389,000) (1,933,000) (1,553,000) ----------- ----------- ----------- TOTAL INCOME FROM OPERATIONS $ 6,396,000 $ 4,738,000 $ 2,384,000 =========== =========== =========== IDENTIFIABLE ASSETS: Filtration products $21,833,000 $18,538,000 $13,676,000 Piping system products 36,415,000 37,051,000 30,946,000 Industrial process cooling equipment 11,413,000 Corporate 5,667,000 3,396,000 3,295,000 ----------- ----------- ----------- TOTAL IDENTIFIABLE ASSETS $75,328,000 $58,985,000 $47,917,000 =========== =========== =========== 48 CAPITAL EXPENDITURES: Filtration products $1,371,000 $ 937,000 $ 442,000 Piping system products 1,197,000 1,119,000 1,219,000 Industrial process cooling equipment 10,000 Corporate 148,000 203,000 175,000 ---------- ------------ ----------- TOTAL CAPITAL EXPENDITURES $2,726,000 $ 2,259,000 $ 1,836,000 ========== ============ =========== DEPRECIATION AND AMORTIZATION: Filtration products $ 477,000 $ 336,000 $ 252,000 Piping system products 1,049,000 880,000 606,000 Industrial process cooling equipment 14,000 Corporate 270,000 119,000 44,000 ---------- ------------ ----------- TOTAL DEPRECIATION AND AMORTIZATION $1,810,000 $ 1,335,000 $ 902,000 ========== ============ =========== Export sales totaled $9,785,000 for the year ended January 31, 1997 and were less than 10% of consolidated net sales for the years ended January 31, 1996 and January 31, 1995. Foreign net sales and identifable assets were less than 10% of consolidated net sales and total assets, respectively, for all years reported. NOTE 12 -- SUPPLEMENTAL CASH FLOW INFORMATION A summary of annual supplemental cash flow information follows:
Year Ended January 31, 1997 1996 1995 ------------------------------------ Cash paid for: Income taxes $ 2,225,000 $ 1,757,000 $1,032,000 Interest 1,076,000 928,000 410,000 Schedule of Noncash Investing and Financial Activities: Fixed assets acquired under capital leases $ 643,000 $ 216,000 $ 287,000 =========== =========== ========== Settlement of Ricwil acquisition contingencies: Fair value of assets acquired $(1,476,000) Cost in excess of net assets acquired 889,000 Common stock redeemed 125,000 ----------- Liabilities reduced $ (462,000) =========== Purchase of businesses: Fair value of assets acquired (net of cash received) $ 9,921,000 $ 1,140,000 $4,778,000 Cost in excess of net assets acquired 3,311,000 (110,000) 1,946,000 Cash paid (211,000) (690,000) (860,000) Common stock issued (3,418,000) (423,000) ------------ ----------- ---------- Liabilities assumed $ 9,603,000 $ 340,000 $5,441,000 =========== =========== ==========
49 NOTE 13 -- STOCK OPTIONS Under the 1989, 1993 and 1994 Stock Option Plans (Option Plans) 150,000, 100,000 and 250,000 shares of common stock, respectively, are reserved for issuance to key employees of the Company and its affiliates as well as selected advisors and consultants to the Company. In addition, under the 1994 Option Plan, an additional one percent of shares of the Company's common stock outstanding are added to the shares reserved for issuance each February 1, beginning February 1, 1995. Option exercise prices will be no less than fair market value for the common stock on the date of grant. The options granted under the Option Plan may be either non-qualified options or incentive options. Such options vest ratably over 4 years and are exercisable for up to ten years from the date of grant. The Company issued a stock purchase warrant to an investment banker in connection with the Company's public sale of common stock. The warrant entitles the holder to purchase 15,000 shares of common stock at $8.10 and may be exercised through January 1999. Pursuant to the 1990 Independent Directors' Stock Option Plan (Directors' Plan) an option to purchase 10,000 shares of common stock is granted automatically to each director who is not an employee of the Company ("Independent Director") on the date the individual is first elected as a director of the Company. In addition, on June 20, 1995, options to purchase 1,000 shares were granted to each Independent Director and options to purchase 1,000 shares are to be granted to each Independent Director annually thereafter. Option exercise prices will be at fair market value of the common stock on the date of grant. Such options vest ratably over 4 years and are exercisable up to ten years from the date of the grant. The following summarizes the changes in options and warrants under the plans:
Year Ended January 31, 1997 1996 ----------------------------------------------------- Weighted Average Weighted Average Shares Exercise Price Shares Exercise Price ----------------------------------------------------- Outstanding at beginning of year 391,300 $6.60 291,700 $7.33 Granted 89,000 6.88 99,600 4.45 Exercised (750) 4.44 ------- ------- Outstanding at end of year 479,550 6.65 391,300 6.60 ======= ======= Options exercisable at year-end 271,525 206,525 Weighted average fair value of options granted during the year $3.83 $2.49
50 The following table summarizes information concerning outstanding and exercisable options and warrants at January 31, 1997:
Exercise Price Options Outstanding Options Exercisable - -------------- ------------------- ------------------- Number Weighted Average Weighted Average Number Weighted Average Outstanding at Remaining Exercise Exercisable at Exercise Jan. 31, 1997 Contractual Life Price Jan. 31, 1997 Price - -------------------------------------------------------------------------------------------------------- $8.10 15,000 2.0 $8.10 15,000 $8.10 6.50 10,000 3.2 6.50 10,000 6.50 8.00 117,200 3.4 8.00 110,250 8.00 6.75 139,500 7.0 6.75 104,625 6.75 7.25 10,000 7.0 7.25 7,500 7.25 4.44 95,850 8.2 4.44 23,400 4.44 4.88 3,000 8.4 4.88 750 4.88 6.88 89,000 9.2 6.88 6.88 -------- ------- 479,550 271,525 ======== =======
The weighted average fair value of options granted during fiscal 1997 and 1996 is estimated at $3.83 and $2.49 per share, respectively, on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
1997 1996 ------------------- Expected volatility 43.00% 42.30% Expected life in years 7 7 Risk-free interest rate 6.58% 6.95% Dividend yield 0.0% 0.0%
Had compensation cost for the Company's fiscal 1997 and 1996 grants for stock-based compensation plans been recognized consistent with SFAS 123, the Company's net income and earnings per share for fiscal 1997 and 1996 would approximate the pro forma amounts below:
1997 1996 ---------------------- Net income - as reported $3,230,000 $2,373,000 Net income - pro forma 3,153,000 2,345,000 Net income per common share - as reported $0.70 $0.52 Net income per common share - pro forma $0.68 $0.52
For the purpose of pro forma disclosure, the estimated compensation costs are amortized to expense over the options vesting period, four years. Therefore, because SFAS 123 is applicable only to options granted subsequent to January 31, 1995, its pro forma effect will not be fully reflected until fiscal 2000. 51 NOTE 14 -- QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a summary of the unaudited quarterly results of operations for the years ended January 31, 1997 and 1996:
Fiscal 1997 Three Months Ended April July Oct. Jan. 30th 31st 31st 31st --------------------------------------------------- Net Sales $18,813,000 $26,142,000 $25,326,000 $23,292,000 Gross Profit 4,112,000 6,034,000 6,150,000 5,509,000 Net Income 394,000 1,132,000 1,192,000 512,000 Per Share Data: Net Income $0.09 $0.25 $0.26 $0.11
Fiscal 1996 Three Months Ended April July Oct. Jan. 30th 31st 31st 31st -------------------------------------------------- Net Sales $18,021,000 $21,858,000 $25,883,000 $20,076,000 Gross Profit 3,439,000 4,517,000 4,834,000 4,090,000 Net Income 322,000 759,000 897,000 395,000 Per Share Data: Net Income $0.07 $0.17 $0.20 $0.09
52 Schedule II MFRI, Inc. And Subsidiaries VALUATION AND QUALIFYING ACCOUNTS For the years ended January 31, 1997, 1996 and 1995
COL. A COL. B COL. C COL. D COL. E - -------------------------------------------------------------------------------------------------------------------- ADDITIONS ------------------------- (1) (2) Balance at Charged to Charged to beginning Costs and Other Deductions From Balance at End DESCRIPTION of period Expenses Accounts Reserves of Period - -------------------------------------------------------------------------------------------------------------------- Year ended January 31, 1997: Allowance for possible losses in collection of trade receivables $199,000 99,000 $10,000 (A) $38,000(B) $270,000 ======== ======= ========= ======= ======== Year ended January 31, 1996: Allowance for possible losses in collection of trade receivables $269,000 $84,000 ($137,000)(A) $17,000(B) $199,000 ======== ======= ========= ======= ======== Year ended January 31, 1995: Allowance for possible losses in collection of trade receivables $95,000 $88,000 $137,000 (A) $51,000(B) $269,000 ======== ======= ========= ======= ========
Note -- A Acquired with purchase of business or (reversed) as part of settlement of purchase agrement Note -- B Uncollectible accounts written off. 53 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MFRI, INC. Date: April 30, 1997 By: /s/ David Unger ---------------------------------- David Unger, Chairman of the Board of Directors Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the registrant and in the capacities and on the date indicated. DAVID UNGER* Director and Chairman of the ) Board of Directors (Principal ) Executive Officer) ) ) HENRY M. MAUTNER* Director ) April 30, 1997 ) GENE K. OGILVIE* Director ) ) FATI A. ELGENDY* Director ) ) BRADLEY E. MAUTNER* Director ) ) DON GRUENBERG* Director ) ) MICHAEL D. BENNETT* Vice President, Secretary and ) Treasurer (Principal Financial ) and Accounting Officer) ) ) ARNOLD F. BROOKSTONE* Director ) ) EUGENE MILLER* Director ) ) STEPHEN B. SCHWARTZ Director ) ) ) *By:/s/ David Unger Individually and as Attorney-in-Fact ) ---------------- ) David Unger ) 54 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION PAGE NO.+ - ----------- ----------------------------------------------------- --------- 2(a) Agreement for Merger, dated October 25, 1996, by and between MFRI, Inc. and Midwesco, Inc. [Incorporated by reference to Appendix A of the Company's Proxy Statement dated November 12, 1996 relating to the Special Meeting of Stockholders of MFRI, Inc. held on December 16, 1996 (SEC File No. 1-18370)] 2(b) Agreement and Plan of Merger, as amended, dated October 25, 1996, by and between MFRI, Inc. and Midwesco, Inc. [Incorporated by reference to Exhibit 2.2 of the Company's Current Report on Form 8-K dated December 30, 1996 (SEC File No. 0-18370)] 3(a) Certificate of Incorporation of MFRI, Inc. [Incorporated by reference to Exhibit 3.3 to Registration Statement No. 33-70298] 3(b) By-Laws of MFRI, Inc. [Incorporated by reference to Exhibit 3.4 to Registration Statement No. 33-70298] 4(a) Specimen Common Stock Certificate [Incorporated by reference to Exhibit 4 to Registration Statement No. 33-70794] 10(a) Management Services Agreement dated December 30, 1996 by and between MFRI, Inc. and Midwesco, Inc. (formerly known as Midwesco-Illinois, Inc.) 10(b) 1989 Stock Option Plan, as amended [Incorporated by reference to Exhibit 10(c) to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1990*] 10(c) 1993 Stock Option Plan [Incorporated by reference to Exhibit 10.4 of Registration Statement No. 33-70794] 10(d) 1994 Stock Option Plan [Incorporated by reference to Exhibit 10(c) to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1994 (SEC File No. 0-18370)] - ------------------------------- }Included only in manually signed original *SEC File No. 33-31850 E-1 55 EXHIBIT NO. DESCRIPTION PAGE NO.+ - ----------- ----------------------------------------------------- --------- 10(e) 1990 Independent Directors Stock Option Plan, as amended [Incorporated by reference to Exhibit 10.8 to Registration Statement No. 33-70794)] 10(f) Form of Directors Indemnification Agreement [Incorporated by reference to Exhibit 10.7 to Registration Statement No. 33-70298] 10(g) Asset Purchase Agreement dated as of September 30, 1994 by and among Ricwil Piping Systems Limited Partnership, The Ricwil Piping systems Company and MFRI, Inc. [Incorporated by reference to Exhibit 2.1 to the Company's current report on Form 8-K dated September 30, 1994 (SEC File No. 0-18370)] 10(h) Industrial Building Lease dated November 18, 1976 by and between American National Bank and Trust Company of Chicago, not personally but solely as Trustee, and known as Trust No. 39340, and MFRI, Inc. 11 Statement regarding computation of per share earnings 21 Subsidiaries of MFRI, Inc. 23 Consent of Deloitte & Touche LLP 24 Power of Attorney executed by directors and officers of the Company DRW2366 - ----------------------- }Included only in manually signed original *SEC File No. 33-31850 E-2 EX-10.(A) 2 MANAGEMENT SERVICES AGREEMENT 1 EXHIBIT 10(a) MANAGEMENT SERVICES AGREEMENT THIS MANAGEMENT SERVICES AGREEMENT is dated as of December 30, 1996, by and between MFRI, INC., a Delaware corporation ("MFRI"), and MIDWESCO-ILLINOIS, INC., an Illinois corporation ("New Midwesco"). W I T N E S S E T H: WHEREAS, MFRI, Midwesco Filter Resources, Inc., a wholly-owned subsidiary of MFRI, and Midwesco, Inc., an Illinois corporation ("Midwesco"), have heretofore entered into that certain Management Services Agreement dated as of January 28, 1994; WHEREAS, MFRI and Midwesco are parties to that certain Agreement and Plan of Merger dated as of October 25, 1996, as amended (the "Agreement for Merger"), pursuant to which Midwesco merged (the "Merger") with and into MFRI, all as set forth in the Agreement for Merger; WHEREAS, prior to the consummation of the Merger, Midwesco contributed certain of its assets and liabilities to New Midwesco; and WHEREAS, the parties hereto believe that the mutual rendering of services by MFRI and New Midwesco to each other will be to the mutual benefit of each of the parties hereto. NOW, THEREFORE, for good and valuable consideration, the receipt of which is hereby acknowledged, MFRI and New Midwesco hereby agree as follows: 1. From and after the date hereof, New Midwesco will provide facilities and services as reasonably requested by MFRI and its subsidiaries and New Midwesco will provide such facilities and services as reasonably requested by MFRI and its subsidiaries. In addition, the parties shall share the services of such of their respective employees as they mutually agree. Notwithstanding the foregoing, in no event shall either party be required to hire any additional personnel or acquire any additional facilities or equipment to provide facilities, equipment or services pursuant to this Agreement. 2. The party providing services, equipment and facilities will be reimbursed by the party receiving such services, such equipment and such facilities on the basis of an allocation of the costs for such shared employees, services and facilities based on the cost accounting method used by MFRI and its subsidiaries and New Midwesco. The respective compensation expense of shared employees will be divided between the parties based upon the level of services performed by such employees performed for each party. 3. Each quarter the parties shall prepare a schedule of the allocated costs that such party has incurred on behalf of the other party and the party having a debit balance shall pay to 2 the party having a credit balance the amount owed. Once each year after the close of the year, the parties shall prepare a schedule of all of the costs and expenses as allocated for such year which schedule shall be subject to review by independent auditors appointed by the parties to review the annual schedule. The decision of the independent auditors with respect to the appropriate allocation of costs shall be final. As soon as practicable after the review of the annual schedule of cost and expenses by the independent auditors for any year, the party, if any, having a debit balance for such year, shall pay any amounts owed for such year to the other party. 4. New Midwesco acknowledges that, pursuant to the Agreement for Merger, MFRI is successor to Midwesco's rights and obligations as tenant under that certain Lease dated November 18, 1976, as amended March 1, 1992, by and between Midwesco and certain affiliates of Midwesco and MFRI for the premises located at 7720 Lehigh Avenue, Niles, Illinois, space in which New Midwesco utilizes, and that for purposes of determining the costs allocated with respect to space at such facility, such costs will be based to the extent applicable on the amounts payable under said lease. 5. New Midwesco acknowledges that, pursuant to the Agreement for Merger, MFRI is successor to Midwesco's rights and obligations as tenant under that certain Lease dated June 1, 1995, by and among Midwesco and LaSalle National Trust, N.A., as Trustee Under Trust Dated April 20, 1979 and known as Trust No. 26-5317-00 for the premises located at 6153 Mulford Court, Niles, Illinois, space in which New Midwesco utilizes, and that for purposes of determining the costs allocated with respect to space at such facility, such costs will be based to the extent applicable on the amounts payable under said lease. 6. MFRI may make available to key employees of New Midwesco and its affiliates (including directors and officers), advisors and consultants who perform services for the benefit of MFRI, stock options under stock options plans of MFRI to such persons and in such quantities and at such times as MFRI shall determine, in its sole discretion, after consultation with New Midwesco. 7. This Agreement shall be for an initial term ending on January 31, 1998 and thereafter shall continue on a year to year basis. Notwithstanding the foregoing, this Agreement may be terminated by either party, without penalty, upon not less than thirty (30) days prior written notice as of January 31 of any year. 2 3 IN WITNESS WHEREOF, the parties have executed this Agreement as the date first set forth above. MFRI INC., a Delaware corporation By: /s/ Michael D. Bennett Its: Vice President MIDWESCO-ILLINOIS, INC., an Illinois corporation By: /s/ Michael D. Bennett Its: Vice President 3 EX-10.(H) 3 INDUSTRIAL BUILDING LEASE DTD. 11/18/76 1 EXHIBIT 10(h) LEASE AMENDMENT THIS LEASE AMENDMENT, made as of the 31st day of August, 1982, by and between AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO, as Trustee under Trust Agreement dated September 15, 1976, and known as Trust No. 39340 ("Landlord") and MIDWESCO, INC. (formerly known as Midwesco-Enterprise, Inc.), an Illinois corporation ("Tenant"); WITNESSETH: A. On November 18, 1976, Landlord and tenant entered into an industrial building lease (the "Lease") whereby Landlord leased to Tenant and Tenant leased from Landlord the real estate, and all improvements located thereon, legally described in Exhibit "A" attached hereto (the "Premises"); B. Pursuant to Section 4.0 of the Lease, Tenant is required to pay to Landlord, as annual rent for the Premises, an annual rent amount equal to $220,000; C. Tenant desires to remodel a portion of the premises by converting approximately 3,000 square feet of shop space in the Premises to approximately 6,000 square feet of double decked office space; D. Landlord and Tenant mutually desire to amend the Lease to permit certain alterations to the Premises and to provide for an increased annual rent to be paid by Tenant to Landlord. NOW, THEREFORE, for and in consideration of the foregoing Recitals and the mutual promises, covenants and agreements hereinafter set forth, the parties hereto agree as follows: 1. Section 4.0 of the Lease is deleted in its entirety and the following is substituted in lieu thereof: 2 4.0 Rent. A. For purposes of this Section 4.0, the following words and phrases shall have the following meanings: 1. "Adjustment Date" shall mean February 1, 1983 and each February 1 thereafter falling within the term of the Lease. 2. "Adjustment Year" shall mean each 12 calendar month period falling within the term of the Lease which period shall commence on an Adjustment Date and end on the January 31st next following such Adjustment Date. 3. "CPI" shall mean the Consumer Price Index For All Urban Consumers, applicable to the Chicago, Illinois area published by the United States Department of Labor, Bureau of Labor Statistics. If the Consumer Price Index is discontinued or is unavailable, Landlord will substitute a comparable index reflecting changes in the cost of living or purchasing power of the consumer dollar published by any other governmental agency, bank or other financial institution, or any recognized authority. B. Effective each Adjustment Date, Tenant's annual rate of rent for the Adjustment Year in which such Adjustment Date falls shall be an amount equal to (i) the annual rate of rent hereunder, in effect on a fraction, the day immediately preceding such Adjustment Date, multiplied by a fraction, the denominator of which is the CPI for the thirteenth month preceding such Adjustment Date and the numerator of which is equal to the denominator plus three-fifths of the increase in the CPI during the twelve months preceding the date which is one month before the adjustment date, provided, however, that if, on any Adjustment Date, the calculation described in this Section 4.0(B) results in an annual rate of rent which is lets than the annual rate of rent for the immediately preceding Adjustment Year, then the annual rate of rent for the Adjustment Year in which such Adjustment Date falls shall be the annual rate of rent for the immediately preceding Adjustment Year. C. Tenant shall pay the rent provided for in Section 4.01(B) above, to or upon the direction of David Unger and Henry Mautner, c/o David Unger and Henry Mautner, 7720 North Lehigh Avenue Niles, Illinois, until otherwise notified in writing by Landlord, in equal monthly installments, in advance, on the first day of each calendar month failing within the term of the Lease. Such rent shall be paid as aforesaid without demand, notice, deduction, set off, discount or abatement and in lawful money of the United States. 2. Landlord hereby consents to the performance of the remodeling work (the"Work") described in Recital C above on the following terms and conditions: (a) The Work shall be performed at the sole cost and expense of Tenant and Tenant hereby covenants and agrees to keep the Premises at all times free and clear of all liens and encumbrances arising out of or in connection with the performance of the Work; and . 3 (b) The Work shall be performed in a good and workmanlike manner in accordance with plans and specifications approved by Landlord. 3. This Lease Amendment shall be null and void and of no force or effect unless and until such time as Equitable Life Insurance Company of Iowa, holder of a first mortgage encumbering the Premises and the collateral assignee of the Landlord's interest in the lease, executes and delivers the Consent to Lease Amendment attached hereto as Exhibit "B". 4. The Lease, as hereinabove amended, shall remain in full force and effect. IN WITNESS WHEREOF, the parties hereto have executed this Lease Amendment as of the date first above written. LANDLORD: AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO, as Trustee aforesaid By: Title: TENANT: MIDWESCO, INC. (formerly known as Midwesco-Enterprise, Inc.), an Illinois corporation By: Title: 4 EXHIBIT "A" LEGAL DESCRIPTION THAT PART OF THE NORTH HALF OF THE SOUTHEAST QUARTER OF THE NORTHWEST QUARTER OF SECTION 29, TOWNSHIP 41 NORTH, RANGE 13 EAST OF THE 3RD PRINCIPAL MERIDIAN, LYING WEST OF THE WEST LINE OF THE CHICAGO, MILWAUKEE AND ST. PAUL RAILROAD, AS ESTABLISHED BY DEED RECORDED OCTOBER 17, 1872, AS DOCUMENT 626/8, AND ALSO WEST OF THE EASTERLY 60 FEET ACQUIRED BY TOWNSHIP DEDICATION, MAY 21, 1907, FOR LEHIGH AVE., EXCEPT THE NORTH 33 FEET THEREOF, ALSO EXCEPT THE WEST 237.40 FEET THEREOF, ALSO EXCEPTING THAT PORTION OF THE ABOVE DESCRIBED TRACT HERETOFORE CONVEYED TO THE PUBLIC SERVICE COMPANY OF NORTHERN ILLINOIS, DESCRIBED AS THAT PART OF THE SOUTH 2 CHAINS, WEST OF THE WEST LINE OF THE CHICAGO, MILWAUKEE AND ST. PAUL RAILROAD RIGHT OF WAY IN THE NORTH 1/2 OF THE SOUTHEAST 1/4 OF THE NORTHWEST 1/4 OF SECTION 29, TOWNSHIP 41 NORTH, RANGE 13 EAST OF THE 3RD PRINCIPAL MERIDIAN, LYING EASTERLY OF A LINE PARALLEL TO THE WEST LINE OF SAID SECTION AND 100 FEET WEST OF THE INTERSECTION OF THE WESTERLY LINE OF LEHIGH AVE., AND THE NORTH LINE OF SAID TRACT, IN THE VILLAGE OF NILES, COOK COUNTY, ILLINOIS. 5 EXHIBIT "B" CONSENT TO LEASE AMENDMENT EQUITABLE LIFE INSURANCE COMPANY OF IOWA, an Iowa corporation, pursuant to that certain Assignment recorded in the office of the Cook County, Illinois Recorder of Deeds as Document No. 6503442, as collateral assignee of that certain lease (the "Lease') dated November 18, 1976, by and between American National Bank and Trust Company of Chicago, as Trustee under Trust Agreement dated September 15, 197.6 and known as Trust No. 39340, as Landlord, and Midwesco, Inc. (formerly known as Midwesco-Enterprise, Inc.), an Illinois corporation, as Tenant, and as holder of a mortgage encumbering the premises described on Exhibit A to the foregoing Lease Amendment, which mortgage is recorded in the office of the Cook County, Illinois Recorder of Deeds as Document No. 23743556, hereby consents to the execution and delivery of the foregoing Lease Amendment and to the alteration of the premises thereby contemplated. EQUITABLE LIFE INSURANCE COMPANY OF IOWA, an Iowa corporation By: Title: 6 FIRST AMENDMENT TO INDUSTRIAL BUILDING LEASE THIS FIRST AMENDMENT is made as of the 1st day of March, 1992, by and between AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO, not personally but solely as Trustee, and known as Trust No. 39340 ("Landlord"), and MIDWESCO, INC. (formerly known as Midwesco-Enterprise, Inc.), an Illinois corporation ("Tenant"). W I T N E SS E T H: A. Landlord and Tenant entered into a certain lease dated November 18, 1976 (the "Lease"), whereby Landlord leased to tenant certain premises (the "Premises") located at 7720 North Lehigh Avenue, Niles, Illinois for a lease term expiring on December 31, 2001. B. Landlord and Tenant desire to amend the Lease to extend the term of the Lease by six years, upon the terms and conditions hereinafter set forth. NOW, THEREFORE, for good and valuable consideration, the receipt and legal sufficiency of which are hereby acknowledged, Landlord and Tenant hereby agree as follows. 1. Term. The term of the Lease is hereby extended for one additional term of 6 years which shall expire on December 31, 2007, unless sooner terminated as otherwise provided in the Lease. All of the terms and provisions of the Lease shall apply during the term of the Lease, as hereby extended, except as otherwise specifically set forth in this First Amendment. 2. Base Rent. Notwithstanding anything contained in Section 4.0 of the Lease to the contrary, effective April 1, 1992 the annual base rent for the Premises shall be $393,000, which amount shall be payable in monthly installments of $32,750. 3. Binding Effect. The Lease, as hereby amended, shall continue in full force and effect, subject to the terms and provisions thereof and hereof. This First Amendment shall be binding upon and inure to the benefit of Landlord, Tenant and their respective successors and permitted assigns. 4. Conflict. In the event of any conflict between the terms or provisions of the Lease and the terms and provisions of this First Amendment, the terms and provisions of this First Amendment shall govern and control. 7 IN WITNESS WHEREOF, this First Amendment is executed as of the day and year aforesaid. LANDLORD: AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO, not personally but solely as Trustee under Trust Agreement dated September 15, 1976, and known as Trust No. 39340 BY: Title: TENANT: MIDWESCO, INC. (formerly known as Midwesco-Enterprise, Inc.), an Illinois corporation BY: Title. 8 SITE AGREEMENT NO. 41- Niles, Illinois THIS AGREEMENT, made this 8th day of April, 1987, between AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO, not personally, but as Trustee under Trust Agreement dated September 15, 1976 and known as Trust No. 39340 ('Lessor'), and ROGERS RADIO CALL, INC., an Illinois corporation ("Lessee"). W I T N E S E T H: That Lessor, for and in consideration of the covenants and agreements hereinafter mentioned to be kept and performed by Lessee, has demised and leased to Lessee a portion of the property legally described on Schedule I attached hereto and made a part hereof ('Property'), which portion consists of the real estate situated in the Village of Niles, in the County of Cook and State of Illinois, described in Exhibit A and depicted in Exhibit B, both of which are attached hereto and made a part hereof, together with all right, title and interest of Lessor in and to all easements, privileges and other appurtenances pertaining to said real estate (which real estate and the foregoing right, title and interest of Lessor shall hereinafter collectively be called the 'Promises'), and has granted and conveyed to Lessee certain Easements (as such phrase is hereinafter defined) appurtenant to the Premises. TO HAVE AND TO HOLD the Premises and the Easements, unto Lessee, for a term (the "Term") commencing on the date of execution hereof and ending April 30, 2017, and for any Extended Terms (as such phrase is hereinafter defined). AND Lessee, in consideration of the leasing of the Premises and the granting of the Easements by Lessor, and of Lessor's representations herein, does covenant and agree with Lessor as follows: 1. Lessee shall pay Lessor as rent for the Premises, for the Term, without set-off, deduction or credit whatsoever, the amounts set forth in paragraph 2 hereof, all of which payments shall be made to Lessor at 7720 Lehigh Avenue, Niles, Illinois 60648, Attention Henry M. Mautner, or such other place as the Lessor may designate from time to time by notice to Lessee. Lessee's covenant to pay rent shall be independent of every other covenant contained in this agreement. 2. The rent payable by Lessee to Lessor shall be as follows: $50,000.00 (the "Lump Sum Payment") on the earlier of (a) May 1, 1987 and (b) the later of (i) the date hereof and (ii) ten (10) days after Lessee shall have obtained all necessary local, municipal, county, state and federal approvals, licenses, variations, ordinance amendments and permits, so as to permit construction on and use and occupancy of the Promises for all of the purposes set forth in paragraph 3 hereof (all of which approvals, licenses, variations, ordinance amendments and permits shall hereinafter collectively be called the ("Approvals"), and $600 per month thereafter through April 30, 1992; $1,200 per month for the period from May 1, 1992 through April 30, 1997; $1,500 per 9 month for the period from May 1, 1997 through April 30, 2002; $1,800 per month for the period from May 1, 2002 through April 30, 2007; $2,100 per month for the period and $2,400 per month for the period from May 1, 2012 through April 30, 2017. Such monthly installments shall be payable one each in advance on the first day of every calendar month during said period through the date of expiration of the Term, or such earlier date as this agreement is terminated. 3. The Premises may be used only in connection with the operation of a cellular mobile telephone system, a radio tower, radio equipment, antennas and microwave and other dishes and for transmitting and receiving communications signals, and, in connection therewith, for the installation, repair, maintenance, operation, housing and removal of antennas, microwave and other dishes, wires, transmitters, receivers, appliances, machinery, trade fixtures and communications and other equipment (collectively, the "Equipment"), whether freestanding or located on a tower or in buildings or other improvements to be constructed upon or in the Premises, or for any other related purpose. 4.A. The Premises are not readily accessible to a public way, and electric, telephone and other utility services are not available directly to the Premises. Accordingly, Lessor shall and does hereby grant and convey to Lessee, the following non-exclusive easements ("Easements"): (i) an Easement over and across those portions of the Property described on Exhibit A attached hereto and depicted on Exhibit B attached hereto as "EASEMENT FOR INGRESS AND EGRESS I" and "EASEMENT FOR INGRESS AND EGRESS II" (collectively, "Easement #1"), to provide suitable, adequate and direct access, twenty-four (24) hours each and every day, seven (7) days each and every week, for ingress and egress and passage of pedestrians, vehicles and construction materials and equipment, to and from the Premises from and to the nearest public way, and to provide parking and storage for service vehicles, equipment and supplies during any time, from time to time, that Lessee is servicing, maintaining or repairing the improvements and/or Equipment upon or in the Premises; provided that Lessee's storage of vehicles, equipment and supplies on Easement #1 shall be limited in duration to times when Lessee's Equipment is being serviced; provided that Lessee's use of Easement #1 for storage purposes shall not exceed 24 hours consecutively on any one occasion; and provided that Lessee shall store such vehicles, equipment and supplies at Lessee's own risk; (ii) an Easement upon, over, under and across those portions of the Property described on Exhibit A attached hereto and depicted on Exhibit B attached hereto as "EASEMENT FOR PUBLIC UTILITIES NO. ONE" and "EASEMENT FOR PUBLIC UTILITIES NO. TWO", for the construction, installation, removal, repair, relocation, replacement, maintenance and operation of electrical, telephone and other communication facilities as may be required in connection with the transmission and distribution of electricity, telephone and other communications and sounds and signals; and (iii) an Easement upon, over, under and across that portion of the Property described on Exhibit A attached hereto and depicted on Exhibit B attached hereto as "EASEMENT FOR 10 CONSTRUCTION STAGING AREA", being an area thirty-five (35) feet by one hundred twenty (120) feet, adjacent to the Premises, for temporary storage and use of construction materials and equipment during any time, from time to time, that Lessee is constructing, installing, removing, repairing or replacing improvements or Equipment upon or in the Premises as permitted by this agreement, and during the time of clean-up operations after completion of any such construction, installation, removal, repairs or replacements; provided, however, that Lessee shall not place any buildings or structures on the area covered by such Easement; and provided that Lessee shall repair and restore the area covered by such Easement after any such construction, installation, removal, repairs or replacements to at least as good a condition as when Lessee first entered upon the area covered by such Easement; and provided further that Lessee's use of such Easement shall not exceed sixty (60) days consecutively during any twelve (12) month period; and provided further that Lessee shall store such construction materials and equipment at Lessee's own risk. The Easements shall remain in effect during the Term and any Extended Terms. Lessor shall maintain, in at least its present condition and repair, the areas covered by the Easements ("Easement Areas") throughout the Term and any Extended Terms. No additional rent or other consideration shall be payable by reason of Lessor's grant of the Easements. B. (i) Lessor represents that Lessee shall have free and unrestricted access over Easement #1 for ingress and egress and passage of pedestrians, vehicles and construction materials and equipment to and from the Premises during the Term and any Extended Terms, twenty-four (24) hours each and every day, seven (7) days per week, for the purpose of constructing, installing, removing, repairing, replacing, maintaining and operating Lessee's improvements and Equipment, and that Lessor shall not permit or suffer any interference with such free and unrestricted access. Notwithstanding anything to the contrary contained herein, if Lessor's performance of its obligations hereunder is delayed due to a "Cause" (as hereinafter defined), Lessor shall have such additional time to perform its obligations as is equal to the period of delay resulting from the Cause. (ii) Throughout the Term and any Extended Terms, Lessor shall provide snow removal services, at least between the hours of 9:00 a.m. and 5:00 p.m., at least on weekdays other than legal holidays, on concrete or asphalt paved portions of Easement #1, as, when and where necessary to ensure that Lessee shall have such free and unrestricted access to and from Premises from and to an open public street, road or way. Throughout the Term and any Extended Terms, Lessor shall provide Lessee with a telephone number which, if called by Lessee, will ring at a location that is staffed by Lessor or its agents or employees at least between the hours of 9:00 a.m. and 5:00 p.m., at least on weekdays other than legal holidays. If Lessee calls such telephone number from time to time and requests snow removal services from Lessor, Lessor will cause such snow removal services to be provided so that the aforedescribed free and unrestricted access will be restored within two (2) hours of the time of that call. Notwithstanding anything to the contrary contained herein, if Lessor's performance of its snow removal obligations is delayed due to a "Cause" (as hereinafter defined), Lessor shall have such additional time to perform its snow removal obligations as is equal to the period of delay resulting from the Cause. (iii) For purposes of this paragraph 4B, a "Cause" means any one or more of the following: a strike, lockout or labor difficulty; explosion, sabotage, accident, riot, or civil 11 commotion; act of war; fire or other catastrophe; or any other cause beyond Lessor's reasonable control; provided that a lack of funds on the part of Lessor shall not be deemed to be a cause beyond Lessor's reasonable control. C. At Lessee's request from time to time, and without further payment or consideration, Lessor shall grant and convey to the electric and/or telephone utility companies serving or authorized to serve the Premises, by and using such forms of instrument or easement agreement as are then being used by such companies, perpetual easements to use the Easement Areas described in subparagraph 4A (ii) hereof for the purposes set forth in said subparagraph 4A (ii), on such terms and conditions as are customarily contained in such forms of instrument or easement agreement as are then being used by such companies; and Lessor shall take any and all actions acceptable to Lessor in its reasonable discretion and execute, acknowledge and deliver any and all documents (acceptable to Lessor in its reasonable discretion) requested by such companies or Lessee in order to accomplish the foregoing. Lessee shall indemnify Lessor for any expense in connection with the foregoing. 5. Lessor represents that Lessor owns good and marketable title in fee simple to the Premises and the Easement Areas described in paragraph 4A hereof, free and clear of all liens and encumbrances except as set forth on Exhibit C attached hereto and made a part hereof, and Lessor acknowledges that Lessee is relying upon the foregoing in entering into this agreement and in expending monies in connection herewith. Other than a mortgage on the Property, Lessor shall not encumber or permit any encumbrances, liens or restrictions on the title to the Premises or the Easement Areas other than those set forth on Exhibit C hereto, except with the prior written approval of Lessee. Lessor may, at its option, subordinate this agreement and Lessee's interest hereunder to any mortgage, deed of trust, prime lease, or other lien hereafter placed on the Premises; provided that Lessor shall first obtain and deliver to Lessee from any future mortgagee, trustee, fee owner, prime lessor or any person seeking to have an interest in the Premises superior to this agreement, a written non-disturbance agreement providing that (a) as long as Lessee attorns to the mortgagee, trustee, fee owner, prime lessor or other person, its successors and assigns, this agreement shall be recognized by the mortgagee, trustee, fee owner. prime lessor or other person, and that all of the rights of Lessee, including, without limitation, Lessee's options to extend the Term of this agreement, shall remain in full force and effect during the Term and any Extended Term, and (b) as long as Lessee attorns to the mortgagee, trustee, fee owner, prime lessor or other person, its successors or assigns, and performs all of Lessee's obligations hereunder, Lessee shall not be named or joined in any action or proceeding to foreclose or terminate the interest of Lessor or enforce any such mortgage, deed of trust, prime lease or fee owner's rights, or the rights of such other person, brought or filed by any such person. in the event of foreclosure or any enforcement of any such mortgage, deed of trust, prime lease or fee owner's rights, or the rights of such other person, Lessee's rights hereunder shall expressly survive, and this agreement shall in all respects continue in full force and effect; provided that Lessee performs all its obligations hereunder and attorns to the mortgagee, trustee, purchaser at the foreclosure sale, prime lessor, fee owner or other person. The subordination of this agreement and Lessee's interest hereunder to any such mortgage, trust deed, prime lease or other instrument is expressly conditional upon Lessor obtaining and delivering to Lessee such non-disturbance agreement. Provided such non-disturbance agreement is delivered to Lessee, Lessee agrees to execute, if the same is required, any and all instruments in writing which may be requested by Lessor to subordinate Lessee's rights under this agreement to the lien of any such 12 mortgage, deed of trust, prime lease or any other instrument, all as aforesaid. 6. A. Lessee shall pay directly all charges for heat, light, power, telephone and other utilities used in connection with the Premises during the Term and any Extended Terms. In connection with the foregoing, Lessee shall also pay the cost of installation of any necessary separate meters. If Lessee shall fail to pay any such charges when due, Lessor may pay the same, and Lessee shall repay Lessor for any amounts so advanced within fifteen (15) days after receipt of Lessor's statement therefor. B. Lessee shall pay as additional rent during the Term and any Extended Term any portion of the real estate taxes for the parcel of real estate owned by Lessor of which the Premises are a part (which parcel is designated by Permanent Tax Index Number 10-29-105-006-0000) directly attributable to additional improvements included as part of the improvement portion of the assessed valuation of said parcel for and by reason of improvements or additions constructed or made by Lessee on the Premises; provided that Lessee and its agents, in Lessee's name or in the name of Lessor, shall have the right at Lessee's expense to contest the amount and validity, in whole or in part, of any tax or portion thereof for which Lessee is responsible pursuant to the terms hereof, by appropriate proceedings diligently conducted. If any rebate of such real estate taxes is made, the rebate shall be retained by or paid to Lessee based on the proportion which the real estate taxes paid by Lessee bears to the total amount of real estate taxes to which such rebate relates. Lessor shall promptly forward to Lessee copies of all applicable assessment notices and tax bills and other matters relating to the real estate taxes to the end that Lessee is not prejudiced in exercising the rights granted hereunder. C. Lessee shall pay all personal property taxes levied on the Equipment installed by Lessee on the Premises. 7. Lessee shall have the right at any time during the Term and any Extended Terms, at their own expense, to construct or make upon or in the Premises any improvements or additions of whatever kind or description necessary or convenient to the use of the Premises in accordance with paragraph 3 of this agreement, and to install Equipment, upon or in the Premises, and to remove any such improvements, additions and Equipment so constructed, made or installed. Upon completion of initial construction and installation of improvements, additions and Equipment on the Premises, Lessee shall secure the Promises by installing on the Premises at Lessee's expense a ten (10) foot tall fence, or such smaller fence as may be the highest fence permitted under local law. Any and all improvements or additions so constructed or made, and any and all Equipment so installed, upon or in the Premises, shall remain personal property notwithstanding the fact that any or all of same may be affixed or attached to the Premises, and, during the Term and any Extended Terms, and upon expiration thereof, or the termination of this agreement, shall belong to and be removable by Lessee. 8. Lessee shall keep the Premises in good condition and repair in accordance with applicable federal, state and municipal laws, and, at the expiration of the Term and any Extended Terms, or such earlier date as this agreement is terminated, Lessee will remove (to the ground level on the date hereof) all above-ground improvements, additions and Equipment constructed, made or installed by Lessee, will place the Premises in a reasonably level and non-hazardous condition, and will otherwise yield up the Premises in at least as good a condition as when the 13 same were entered upon by Lessee, loss by casualty and ordinary wear and tear excepted. 9. Lessee and its agents may apply to the appropriate governmental authorities and public utilities for any Approvals and easements required of or deemed necessary or useful by Lessee for its use of the Premises, or in order to construct or make improvements or additions, or to install Equipment, upon or in the Premises. Lessor shall join in any such applications as requested by Lessee and shall cooperate fully with Lessee in connection with the foregoing and, upon request of Lessee, shall take any and all actions and execute, acknowledge and deliver any and all documents and instruments reasonably requested by Lessee (including, without limitation, the grant of utility easements), provided that none of the foregoing actions, documents or instruments shall impose any liability on Lessor. Lessee shall pay directly any costs in connection with the foregoing. Lessee shall pay all license, permit and inspection fees required in connection with its use of the Premises or the conduct of its business thereon. Notwithstanding anything to the contrary contained herein, Lessee shall not apply for any zoning change the effect of which will interfere with the current use of the Property or make the current use of the Property non-conforming under the applicable law, and no aspect of any zoning change granted in connection with Lessee's initial construction and installation of improvements, additions and/or Equipment upon or in the Premises shall rely on any other portion of the Property to satisfy zoning requirements applicable to the Premises. 10. This agreement and Lessee's obligations under this agreement are contingent upon the occurrence of the following events on or before April 30, 1987: Lessee shall have received the Approvals and easements referred to in paragraphs 2, 4C and 9 hereof. If by said date one or more of such events shall not have occurred, then at Lessee's option, which shall be exercised, if at all, on or before April 30, 1987, Lessee may waive such contingencies and thereby continue this agreement in full force and effect, or Lessee may terminate this agreement effective on or before said date by notice to Lessor. Upon such termination by Lessee, this agreement, the Term and all of Lessee's obligations contained herein shall forthwith terminate and end on the date specified in such notice; provided that if Lessee terminates this agreement pursuant to this paragraph 10, Lessor shall refund the Lump Sum Payment to Lessee within ten (10) days after Lessee's notice of termination, but Lessor shall be entitled to retain all other rent theretofore paid by Lessee. Notwithstanding anything to the contrary contained herein, upon such termination, Lessee shall indemnify Lessor for any liabilities arising prior to such termination due to Lessee's acts or omissions on the Premises or the Easement Areas. 11. Lessee Shall indemnify and hold harmless Lessor, Lessor's beneficiaries, any mortgagee of the Premises and/or the Easement Areas ("Mortgagee") and the Premises and the Easement Areas from and against all liens or claims for lien for material or labor by reason of any work done and/or material furnished Lessee in connection with the construction by Lessee of any improvements or additions upon or in the Premises. If any such lien or claim for lien is filed against the Premises or the Easement Areas, or any part thereof, by reason of the construction of any improvements or additions by Lessee, Lessor shall give notice thereof to Lessee and demand that Lessee remove such lien or claim for lien, and if the same is not removed within thirty (30) days after Lessee receives such notice and demand, then (and only then) Lessor may (unless within such thirty (30) day period Lessee furnishes to Lessor a surety bond protecting Lessor against such lien), without inquiring into the validity thereof, remove the same at its own expense, and Lessee shall repay Lessor for any amounts so advanced within fifteen (15) days 14 after receipt of Lessor's statement therefor. 12. Lessee shall, at its own expense, during the Term and any Extended Terms, insure Lessor, Lessor's beneficiaries from time to time, and any Mortgagee whose existence has been made known to Lessee by a notice from Lessor, by an endorsement on a blanket policy or policies or otherwise, with a company or companies authorized to do business in the State of Illinois against any liability which may be incurred by Lessor, Lessor's beneficiaries or any such mortgagee on account of death, bodily injury or property damage which may be sustained by any person or persons or their property who or which might at any time be in or about the Premises. Said policy or policies of insurance shall provide coverage on an occurrence basis and shall be in limits of not less than One Million Dollars ($1,000,000.00), in the event of either bodily injury or death, or property damage, or both, as the result of any one accident or occurrence. Lessee shall deliver certificates therefor to Lessor upon request. The certificate shall contain a statement to the effect that should said policy or policies be canceled prior to the expiration date therof, the issuing company or companies will endeavor to mail thirty (30) days written notice to the certificate holder. In the event Lessee shall fail to procure such public liability insurance or pay the premiums therefor or deliver said certificates therefor to Lessor upon request, Lessor may procure such insurance and pay the premiums therefor, and Lessee shall repay Lessor for any amounts so advanced within fifteen (15) days after receipt of Lessor's statement therefor. In addition, Lessee shall, at its own expense, obtain the following: (a) automobile liability insurance in limits of not less than One Million Dollars ($1,000,000.00); (b) workman's compensation as required by Illinois law; and (c) umbrella liability insurance in limits of not less than Four Million Dollars. 13. Lessee and Lessor shall each be responsible for maintaining insurance covering their own property, whether or not located on the Premises. Lessor and Lessee each hereby waive any and all rights of recovery, claim, action, or cause of action, each may have against the other, its agents, officers or employees, on account of any loss or damage occasioned to Lessor or Lessee, as the case may be, their respective property, the Premises or any improvements thereon or therein, or any personal property of such party thereon or therein, or the Easement Areas, by reason of fire, the elements or any other cause which customarily is insured against under the terms of standard .all risk' property, fire and extended coverage insurance policies, regardless of cause or origin, including negligence of the other party hereto, its agents, officers or employees. Each party hereto, on behalf of its respective insurance companies insuring its property against any such loss, does hereby waive any right of subrogation that such companies may have against the other party hereto. The parties hereto covenant with each other that, to the extent such insurance endorsement is available, they will each obtain, for the benefit of the other, an explicit waiver of any such right of subrogation from its respective insurance companies. 14. Lessee may terminate this agreement by thirty (30) days' notice to Lessor accompanied by a termination fee equal to the greater of (a) Five Thousand Dollars ($5,000.00) and (b) an amount equal to three (3) months rent at the then current rate, and upon such termination the Term and all obligations of the Lessee contained herein shall forthwith terminate and end on the date specified in such notice. If Lessee terminates this agreement pursuant to this paragraph 14, Lessor shall be entitled to retain all rent theretofore paid by Lessee. Notwithstanding anything to the contrary contained herein, upon such termination, Lessee shall indemnify Lessor, Lessor's beneficiaries and any Mortgagees for any liabilities arising prior to 15 such termination due to the acts or omissions of Lessee and its agents and employees on the Premises or the Easement Areas. 15. Lessee shall have the right, without the consent of Lessor, to assign this agreement and the Easements contained herein or sublet all or any part of the Premises for any use permitted by paragraph 3 hereof. In addition, Lessee shall have the right, without the consent of Lessor, to assign or otherwise transfer this agreement, the Easements contained herein, and each, every and all of Lessee's rights, privileges and obligations hereunder, in consideration of or as additional security for any financing or equipment leasing arrangement into which Lessee may enter which may affect Lessee's interest hereunder, and any such assignment or transfer shall not constitute a default under this agreement. Further, Lessee shall have the right to record, register or file such evidence of any such assignment or transfer as may be required in conjunction with any such financing or equipment leasing arrangement, and such recording, registration or filing shall not constitute a default under this agreement. An assignment to a person, firm or corporation which, at the time of such assignment, has a smaller net worth than Lessee then has shall not release Lessee of its obligations under this lease, except an assignment to a corporation into which or with which Lessee merges or consolidates. Lessee shall, within a reasonable time after any assignment, transfer or subletting, notify Lessor of the name and address of the assignee, transferee or sublessee; and Lessee shall, within a reasonable time after any assignment or transfer, provide Lessor with a copy of an instrument whereby the assignee or transferee has assumed Lessee's obligations under this agreement. 16. Lessor, on behalf of itself and all persons, corporations and other entities claiming by, through or under Lessor, covenants and agrees with Lessee that as long as Lessee pays the rent herein reserved and performs all of Lessee's obligations hereunder, subject only to the right of Midwesco, Inc., an Illinois corporation, as Tenant of the Property under a certain lease dated November 18, 1976 between said corporation as Tenant and Lessor hereunder as Landlord, to concurrent use of the Easement Areas, Lessee shall have quiet and peaceful enjoyment and possession of the Premises and the Easement Areas throughout the Term and any Extended Terms, free from claims by any person, corporation or other entity claiming by, through or under Lessor or any person, corporation or other entity claiming under title paramount to Lessor, and shall be entitled to exercise all of Lessee's rights hereunder (including, without limitation, Lessee's options to extend the Term of this agreement) during the Term and any Extended Terms. 17. Lessee will, from time to time, upon ton (10) days' prior request by Lessor, execute, acknowledge and deliver to Lessor a certificate of Lessee stating that this agreement is unmodified and in full force and effect (or, if there have been modifications, that this agreement is in full force and effect as modified, and setting forth such modifications) and the dates to which rent and additional rent have been paid, and either stating that to the knowledge of Lessee no default exists hereunder or specifying each such default of which Lessee has knowledge. Lessor will, from time to time, upon ten (10) days' prior request by Lessee, execute, acknowledge and deliver to Lessee a certificate of Lessor stating that this agreement is unmodified and in full force and effect (or, if there have been modifications, that this agreement is in full force and effect as modified, and setting forth such modifications) and the dates to which rent and additional rent have been paid, and either stating that to the knowledge of Lessor no default exists hereunder or specifying each such default of which Lessor has knowledge. Any such certificate of Lessee or Lessor may be relied upon by any person or entity. 16 18. A. If Lessee shall default in the payment of any installment of the rent hereby reserved and any such default shall continue for a period of ten (10) days after written notice thereof is received by Lessee, or if Lessee shall default in the performance of any other obligation herein contained to be performed by Lessee and any such default shall continue for a period of thirty (30) days after written notice thereof is received by Lessee (provided, however, that if the default reasonably cannot be cured within thirty (30) days, said thirty (30) day period shall be extended for such additional time as is reasonably necessary to cure the default), or if Lessee is adjudicated a bankrupt or a trustee is appointed for Lessee after a petition for reorganization or arrangement has been filed by or against Lessee under the Bankruptcy Act of the united States, or a receiver is appointed for Lessee's business or property (and the order of adjudication or for the appointment of a trustee or receiver has not been vacated within sixty (60) days after the entry thereof), then upon ten (10) days' notice to Lessee (which notice shall not be required if Lessee is adjudicated a bankrupt or a trustee is appointed for Lessee after a petition for reorganization or arrangement has been filed against Lessee under the Bankruptcy Act of the United States, or a receiver is appointed for Lessee's business or property and the order of adjudication or for the appointment of a trustee or receiver has not been vacated within sixty (60) days after the entry thereof), the right of Lessee to possession of the Promises may be terminated and the mere retention of possession thereafter by Lessee shall constitute a forcible detainer of the Promises, and if the Lessor so elects, but not otherwise, and upon notice of such election, this agreement shall thereupon terminate, and upon termination of Lessee's right of possession as aforesaid, whether this agreement be terminated or not, Lessee agrees to surrender possession of the Premises immediately. Lessor hereby expressly waives any and all right to distrain for rent due and any and all landlord's liens or claim of such upon any or all property of Lessee and Lessee's Related Parties, on the Premises or the Easement Areas. B. Concurrently with the execution of this agreement, Lessor's beneficiaries have executed an instrument entitled "Consent to Site Agreement By Lessor's Beneficiaries" whereby said beneficiaries recognize and consent to the terms of this agreement and agree that they will not take any action or suffer any action to be taken which does in any way impair or limit the performance by Lessor of its obligations under this agreement, or which does in any way impair or limit the exercise by Lessee of its rights under this agreement. Lessor hereby agrees that any breach by any of Lessor's beneficiaries, or by any of their respective heirs, executors, administrators, personal representatives, successors or assigns, of any of the covenants contained in said instrument shall constitute a breach by Lessor of its obligations under this agreement. 19. If any suit or action shall be brought to enforce any of the terms, covenants or conditions of this agreement, to restrain any breach of this agreement, to recover any rent under this agreement, to terminate this agreement or to recover possession of the Premises, the party not prevailing in such suit or action shall be liable to the prevailing party for the prevailing party's costs and expenses, including, without limitation, court costs and reasonable attorneys' fees, the amount of which shall be fixed by the court and shall be made a part of any judgment rendered. Each party shall pay all costs and expenses, including, without limitation, court costs and reasonable attorneys' fees, incurred or sustained by the other party in any litigation in which the other party, without its fault, becomes involved or concerned by reason of this agreement. 20. All notices to be given under this agreement shall be in writing and shall be delivered in person or mailed by United States registered or certified mail, postage prepaid, 17 return receipt requested, addressed to Lessor, if intended for it, at the address for payment of rent, and addressed to Lessee, if intended for it, at Cellular One, 840 East State Parkway, Schaumburg, Illinois, 60173 Attention: Business Manager, and shall be deemed given when personally delivered, or on the date indicated on a return receipt that delivery was made or refused. Either party hereto may change the place for notice to it by like written notice to the other. 21. Each party hereto represents that it has full power and authority to enter into this agreement and to perform the covenants and obligations herein contained. Each person executing this agreement represents that he or she is duly authorized to execute this agreement. 22. This agreement and all the rights, covenants and obligations contained in this agreement shall inure to the benefit of-and be binding upon Lessor, Lessor's beneficiaries from time to time, Lessee, and their respective heirs, executors, administrators, personal representatives, successors and assigns as permitted by this agreement. 23. A. In any case where the approval or consent of Lessor is required under this agreement, and if Lessor consists of more than one person or entity, an approval or consent by any of the persons or entities comprising Lessor shall be sufficient, and Lessee may rely upon such approval or consent. In furtherance thereof, each of the persons and entities comprising Lessor does hereby irrevocably make, constitute and appoint each of the other persons and entities comprising the Lessor, acting alone, as its, his or her agent and true and lawful attorney-in-fact, for and in its, his or her name, place and stead to approve, authorize, sign, execute, acknowledge and deliver any and all documents, instruments and certificates in connection with approvals or consents from time to time required, requested or otherwise to be given under this agreement, hereby conferring upon said attorney the most comprehensive powers possible to be given in connection with the foregoing, and hereby ratifying all that said attorney lawfully shall do or cause to be done by virtue of the power of attorney hereby conferred. B. In any case where the approval or consent of either party hereto is required under this agreement, such party shall not unreasonably delay or withhold its approval or consent. 24. This agreement represents the entire, integrated agreement of the parties hereto. No alteration, amendment or addition to this agreement shall be binding upon any party hereto unless contained in a writing signed by the parties. If any clause, phrase, provision or portion of this agreement or the application thereof to any person or circumstance shall be invalid or unenforceable under applicable law, such event shall not affect, impair or render invalid or unenforceable the reminder of this agreement, nor any other clause, phrase, provision or portion hereof, nor shall it affect the application of any clause, phrase, provision or portion hereof to other persons or circumstances. Changes in the number, gender and grammar of terms and phrases herein, where necessary to conform this agreement to the circumstances of Lessor and Lessee, shall in all cases be assumed as though in each case fully expressed herein. This agreement shall be construed in accordance with the laws of the State of Illinois. 25. Lessee shall have options to extend the Term of this agreement for two (2) additional periods of ten (10) years each (the "Extended Terms') upon giving written notice to Lessor of Lessee's exercise of any such option at least one hundred twenty (120) days prior to the expiration of the original Term or any Extended Term; provided that neither such option shall be 18 exercisable if, at the time of exercise or at the time any such Extended Term is to commence, Lessee is in default under this agreement and has failed to cure such default within the time permitted under paragraph 18 of this agreement; and provided that the second option to extend shall cease to exist if Lessee does not exercise the first option to extend. All of the terms and provisions of this agreement shall be effective during each Extended Term, except that the monthly rent payable during the first Extended Term shall be as follows: $2,700 per month for the period from May 1, 2017 through April 30, 2022; and $3,000 per month for the period from May 1, 2022 through April 30, 2027; and the monthly rent payable during the second Extended Term shall be as follows. $3,300 per month for the period from May 1, 2027 through April 30, 2032; and $3,600 per month for the period from may 1, 2032 through April 30, 2037. The word "Term" as used in this agreement shall include the Extended Terms when and as Lessee's options to extend shall be exercised. 26. As additional security for the performance of Lessee's obligations under this agreement, Lessee has concurrently with the execution of this agreement deposited with Lessor the sum of Three Thousand Dollars ($3,000) (the "Security Deposit"). Lessor may apply any part or all of the Security Deposit for the purpose of curing any defaults of Lessee under this agreement if (and only if) Lessee has failed to cure any such default within the time permitted under paragraph 18 of this agreement. Lessee shall pay to Lessor within ten (10) days after receipt of Lessor's written notice a sum of money to replenish such amounts as are properly applied by Lessor from the Security Deposit so that, at all times during the Term and any Extended Terms, the Security Deposit will equal the aforesaid sum. At the expiration or earlier termination of this agreement, if Lessee is not then in default hereunder, Lessor shall return to Lessee the Security Deposit, less such amounts, if any, as have been properly applied by Lessor to cure any defaults of Lessee hereunder. Lessor shall keep the Security Deposit in an interest-bearing "money market account", or a similar interest-bearing demand deposit account, of the type available from major banks. The interest earned on the Security Deposit shall be paid to Lessee not less often than annually. 27. If there occurs a casualty which partially or completely destroys the improvements, additions and/or Equipment constructed, made or installed upon or in the Premises, such event shall not relieve Lessee of the obligation to pay rent hereunder. IN WITNESS WHEREOF, the parties have executed this agreement the day and year first above written. LESSOR: LESSEE: 19 AMERICAN NATIONAL BANK AND ROGERS RADIOCALL, INC. TRUST COMPANY OF CHICAGO, not personally, but as Trustee under Trust Agreement dated BY September 15, 1976 and known as Trust No. 39340 By Attest Its Attest: Its CONSENT BY MIDWESCO, INC. ("MIDWESCO") For and in consideration of Ten Dollars ($10.00) and other valuable consideration, the receipt, adequacy and sufficiency of which is hereby acknowledged, MIDWESCO, being a Tenant under a Lease dated November 18, 1976 between American National Bank and Trust Company of Chicago, as Trustee under Trust No. 39340 ("American"), as Landlord, and MIDWESCO as Tenant, and having an interest in the Premises and/or the Easement Areas (as such phrases are defined in the foregoing Site Agreement No. 41 - Niles, Illinois dated April 8, 1987, between American, as Lessor, and Rogers Radiocall, Inc., as Lessee ("Site Agreement") described in the foregoing Site Agreement, hereby recognizes and consents to the terms of the foregoing Site Agreement; and agrees that it will not take any action, or suffer any action to be taken by any person or entity controlled by MIDWESCO, which does in any way impair or limit the performance by the Lessor (under the foregoing Site Agreement,:) of the Lessor's obligations under the foregoing Site Agreement, or which does in any way impair or limit the exercise by the Lessee (under the foregoing Site Agreement) of the Lessee's rights under the Site Agreement. The provisions hereof shall be binding upon MIDWESCO, its successors and assigns, and its and their respective employees, agents, directors and shareholders. IN WITNESS WHEREOF, MIDWESCO, INC. has executed this instrument this 8th day of April, 1987. MIDWESCO, INC. By Its Attest Its 20 This instrument prepared by Stephen M. Dorfman Altheimer & Gray 333 West Wacker Drive Chicago, Illinois 60606 21 NOTARY ACKNOWLEDGMENT FOR AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO STATE OF ILLINOIS) ) SS. COUNTY OF C 0 0 K) I, Loretta M. Sovienski, a Notary Public in and for the said County, in the State aforesaid, DO HEREBY CERTIFY that __________________, Assistant Vice President of AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO, and ________________, Assistant Secretary thereof, personally known to me as the same persons whose names are subscribed to the foregoing instrument as such Assistant Vice President and Assistant Secretary respectively, appeared before me this day in person and acknowledged that they signed and delivered said instrument as their own free and voluntary act, and as the free and voluntary act of said Bank, for the uses and purposes therein set forth; and said Assistant Secretary did also then and there acknowledge that he as custodian of the corporate seal of said bank did affix said corporate seal of said Bank to said instrument as his own free and voluntary act, and as the free and voluntary act of said Bank for the uses and purposes therein set forth. GIVEN under my hand and Notarial Seal this 9th day of April A.D. 1987. Notary Public My Commission Expires: NOTARY ACKNOWLEDGMENT FOR ROGERS RADIOCALL, INC. STATE OF ILLINOIS ) )SS. COUNTY OF 1, Peter B. Loughman, a Notary Public in and for the County and State aforesaid DO HEREBY CERTIFY that_________________, personally known to me to be the ______________ of ROGERS RADIOCALL, INC., an Illinois corporation, and, personally known to me to be the ________________ of said corporation, and personally known to me to be the same persons whose names are subscribed to the foregoing instrument, appeared before me this day in person and severally acknowledged that as such ________ and _______, respectively, of ROGERS RADIOCALL, INC., they signed and delivered the said instrument, pursuant to authority given by the Board of Directors of said corporation, as their free and voluntary act, and as the free and voluntary act and deed of said corporation, for the uses and purposes therein set forth. GIVEN under my hand and official seal this 9th day of April, 1987. 22 NOTARY ACKNOWLEDGMENT FOR MIDWESCO, INC. STATE OF ILLINOIS ) ) SS. COUNTY OF COOK) I, Peter B. Loughman, Notary Public in and for the County and State aforesaid DO HEREBY CERTIFY that _________________ , personally known to me to be the __________ of MIDWESCO, INC. an Illinois corporation, and __________, personally known to me to be the ____________ of said corporation, and personally known to me to be the same persons whose names are subscribed to the foregoing instrument, appeared before me this day in person and acknowledged that as such _______________ and ______________ respectively, of MIDWESCO, INC. they signed and delivered the said instrument, pursuant to authority given by the Board of Directors of said corporation, as the free and voluntary act and deed of said corporation, for the uses and purposes therein set forth. GIVEN under my hand and official seal this 8th day of April, 1987. 23 SCHEDULE 1 LOT 1 IN DANLEY MACHINE CORPORATION'S SUBDIVISION OF PART OF THE NORTH 1/2 OF THE SOUTH EAST 1/4 OF THE NORTH WEST 1/4 OF SECTION 29, TOWNSHIP 41 NORTH, RANGE 13, EAST OF THE THIRD PRINCIPAL MERIDIAN, IN COOK COUNTY, ILLINOIS. 24 EXHIBIT A Common address, if any, of Premises: 7720 North Lehigh, Niles, Illinois Number of square feet of Premises (excluding Easement Areas and appurtenances): One Thousand Nine Hundred Twenty (1,920) Legal Descriptions: REAL ESTATE DESCRIPTION THAT PART OF THE NORTH HALF OF THE SOUTHEAST QUARTER OF THE NORTHWEST QUARTER OF SECTION TWENTY-NINE, TOWNSHIP FORTY-ONE NORTH, RANGE THIRTEEN, EAST OF THE THIRD PRINCIPAL MERIDIAN, LYING WEST OF THE SOUTHWESTERLY LINE OF THE CHICAGO, MILWAUKEE AND ST. PAUL RAILROAD, AS ESTABLISHED BY DEED RECORDED OCTOBER 17, 1872 AS DOCUMENT NO. 62678, AND ALSO WEST OF THE EASTERLY 60.0 FT. ACQUIRED BY TOWNSHIP DEDICATION, MAY 21, 1907, FOR LEHIGH AVENUE, BOUNDED AND DESCRIBED AS FOLLOWS: COMMENCING AT THE INTERSECTION OF A LINE 132.0 FT. NORTH OF AND PARALLEL TO THE SOUTH LINE OF THE NORTH HALF OF THE SOUTHEAST QUARTER OF THE NORTHWEST QUARTER OF SAID SECTION TWENTY-NINE, AND THE SOUTHWESTERLY LINE OF SAID LEHIGH AVENUE, SAID LINE BEING 60.0 FT. SOUTHWESTERLY OF AND PARALLEL TO THE SOUTHWESTERLY LINE OF SAID CHICAGO, MILWAUKEE AND ST. PAUL RAILROAD; THENCE WEST ALONG SAID 132.0 FT. NORTH PARALLEL LINE A DISTANCE OF 100.0 FT. TO A POINT; THENCE SOUTH ON A LIKE PARALLEL TO THE WEST LINE OF SAID SECTION TWENTY-NINE HAVING AN ASSUMED BEARING OF SOUTH 00 DEGREES-27'-07" EAST A DISTANCE OF 5.0 FT. TO THE POINT OF BEGINNING; THENCE SOUTH ALONG SAID PARALLEL LIKE A DISTANCE OF 60.0 FT.; THENCE SOUTH 89 DEGREES-32'-53" WEST A DISTANCE OF 32.0 FT.; THENCE NORTH 00 DEGREES-27'-07" WEST A DISTANCE OF 60.0 FT.; THENCE NORTH 89 DEGREES-32'-53" EAST A DISTANCE OF 32.0 FT. TO THE POINT OF BEGINNING, ALL IN COOK COUNTY, ILLINOIS. EASEMENT FOR INGRESS AND EGRESS I THAT PART OF THE NORTH HALF OF THE SOUTHEAST QUARTER OF THE NORTHWEST QUARTER OF SECTION TWENTY-NINE, TOWNSHIP FORTY-ONE NORTH, RANGE THIRTEEN, EAST OF THE THIRD PRINCIPAL MERIDIAN, LYING WEST OF THE SOUTHWESTERLY LINE OF THE CHICAGO, MILWAUKEE AND ST. PAUL RAILROAD, AS ESTABLISHED BY DEED RECORDED OCTOBER 17, 1872 AS DOCUMENT NO. 6267B, AND ALSO WEST OF THE EASTERLY 60.0 FT. ACQUIRED BY TOWNSHIP DEDICATION, MAY 21, 1907, FOR LEHIGH AVENUE, BOUNDED AND DESCRIBED AS FOLLOWS: COMMENCING AT THE INTERSECTION OF A LINE 132.0 FT. NORTH OF AND PARALLEL TO THE SOUTH LINE OF THE NORTH HALF OF THE 25 SOUTHEAST QUARTER OF THE NORTHWEST QUARTER OF SAID SECTION TWENTY-NINE, AND THE SOUTHWESTERLY LINE OF SAID LEHIGH AVENUE, SAID LINE BEING 60.0 FT. SOUTHWESTERLY OF AND PARALLEL TO THE SOUTHWESTERLY LINE OF SAID CHICAGO, MILWAUKEE AND ST. PAUL RAILROAD; THENCE WEST ALONG SAID 132.0 FT. NORTH PARALLEL LINE A DISTANCE OF 132.0 FT. TO A POINT; THENCE SOUTH ON A LIKE PARALLEL TO THE WEST LINE OF SAID SECTION TWENTY-NINE HAVING AN ASSUMED BEARING OF SOUTH 00 DEGREES-27'-07" EAST A DISTANCE OF 30.17 FT. TO THE POINT OF BEGINNING; THENCE SOUTH 90 DEGREES-00'-00" WEST A DISTANCE OF 181.87 FT.; THENCE NORTH 00 DEGREES- 21'-43" WEST A DISTANCE OF 139.03 FT.; THENCE NORTH 88 DEGREES-41'-24" EAST A DISTANCE OF 267.68 FT. TO THE SOUTHWESTERLY LINE OF SAID LEHIGH AVENUE; THENCE NORTH 22 DEGREES-46'-08" WEST ON SAID SOUTHWESTERLY LINE A DISTANCE OF 21.49 FT.; THENCE SOUTH 88 DEGREES-4l'-24" WEST A DISTANCE OF 279.49 FT.; THENCE SOUTH 00 DEGREES-2l'-63" EAST A DISTANCE OF 178.57 FT.; THENCE NORTH 90 DEGREES-00'- 00" EAST A DISTANCE OF 201.90 FT.; THENCE NORTH 00 DEGREES-27'-07" WEST A DISTANCE OF 20.0 FT. TO THE POINT OF BEGINNING, ALL IN COOK COUNTY, ILLINOIS. EASEMENT FOR INGRESS AND EGRESS II THAT PART OF THE NORTH HALF OF THE SOUTHEAST QUARTER OF THE NORTHWEST QUARTER OF SECTION TWENTY-NINE, TOWNSHIP FORTY-ONE NORTH, RANGE THIRTEEN, EAST OF THE THIRD PRINCIPAL MERIDIAN, LYING WEST OF THE SOUTHWESTERLY LINE OF THE CHICAGO, MILWAUKEE AND ST. PAUL RAILROAD, AS ESTABLISHED BY DEED RECORDED OCTOBER 17, 1872 AS DOCUMENT NO. 62678, AND ALSO WEST OF THE EASTERLY 60.0 FT. ACQUIRED BY TOWNSHIP DEDICATION, MAY 21, 1907, FOR LEHIGH AVENUE, BOUNDED AND DESCRIBED AS FOLLOWS: COMMENCING AT THE INTERSECTION OF A LINE 132.0 FT. NORTH OF AND PARALLEL TO THE SOUTH LINE OF THE NORTH HALF OF THE SOUTHEAST QUARTER OF THE NORTHWEST QUARTER OF SAID SECTION TWENTY-NINE, AND THE SOUTHWESTERLY LINE OF SAID LEHIGH AVENUE, SAID LINE BEING 60.0 FT. SOUTHWESTERLY OF AND PARALLEL TO THE SOUTHWESTERLY LINE OF SAID CHICAGO, MILWAUKEE AND ST. PAUL RAILROAD; THENCE WEST ALONG SAID 132.0 FT. NORTH PARALLEL LINE A DISTANCE OF 132.0 FT. TO THE POINT OF BEGINNING; THENCE SOUTH ON A LINE PARALLEL TO THE WEST LINE OF SAID SECTION TWENTY-NINE HAVING AN ASSUMED BEARING OF SOUTH 00 DEGREES-27'-07" EAST A DISTANCE OF 30.17 FT.; THENCE SOUTH 90 DEGREES-00'-00- WEST A DISTANCE OF 20.00 FT.; THENCE NORTH 00 DEGREES-27'-07"- WEST A DISTANCE OF 142.73 FT.; THENCE NORTH 88 DEGREES-4l'-24"- EAST A DISTANCE OF 20.00 FT.; THENCE SOUTH 00 DEGREES-27'-07" EAST A DISTANCE OF 113.02 FT. TO THE POINT OF BEGINNING, ALL IN COOK COUNTY, ILLINOIS. EASEMENT FOR PUBLIC UTILITIES NO. ONE THAT PART OF THE NORTH HALF OF THE SOUTHEAST QUARTER OF THE NORTHWEST QUARTER OF SECTION TWENTY-NINE, TOWNSHIP FORTY-ONE NORTH, RANGE THIRTEEN, EAST OF THE THIRD PRINCIPAL MERIDIAN, LYING WEST OF THE SOUTHWESTERLY LINE OF THE CHICAGO, MILWAUKEE AND ST. 26 PAUL RAILROAD, AS ESTABLISHED BY DEED RECORDED OCTOBER 17, 1872 AS DOCUMENT NO. 62678, AND ALSO WEST OF THE EASTERLY 60.0 FT. ACQUIRED BY TOWNSHIP DEDICATION, MAY 21, 1907, FOR LEHIGH AVENUE, BOUNDED AND DESCRIBED AS FOLLOWS: BEGINNING AT THE INTERSECTION OF A LINE 132.0 FT. NORTH OF AND PARALLEL TO THE SOUTH LINE OF THE NORTH HALF OF THE SOUTHEAST QUARTER OF THE NORTHWEST QUARTER OF SAID SECTION TWENTY-NINE, AND THE SOUTHWESTERLY LINE OF SAID LEHIGH AVENUE, SAID LINE BEING 60.0 FT. SOUTHWESTERLY OF AND PARALLEL TO THE SOUTHWESTERLY LINE OF SAID CHICAGO, MILWAUKEE AND ST. PAUL RAILROAD; THENCE WEST ALONG SAID 132.0 FT. NORTH PARALLEL LINE FOR A DISTANCE OF 132.0 FT.; THENCE SOUTH ON A LIKE PARALLEL TO THE WEST LINE OF SAID SECTION TWENTY-NINE HAVING AN ASSUMED BEARING OF SOUTH 00 DEGREES- 27'-07" EAST A DISTANCE OF 29.45 FT.; THENCE SOUTH 89 DEGREES-32'-53" WEST A DISTANCE OF 10.0 FT.; THENCE NORTH 00 DEGREES-27'-07" WEST A DISTANCE OF 39.28 FT.; THENCE NORTH 88 DEGREES-33'-27" EAST A DISTANCE OF 137.93 FT. TO SAID SOUTHWESTERLY LIKE OF LEHIGH AVENUE; THENCE SOUTH 22 DEGREES-46'-08" EAST A DISTANCE OF 10.74 FT. TO THE POINT OF BEGINNING, ALL IN COOK COUNTY, ILLINOIS. EASEMENT FOR PUBLIC UTILITIES NO. TWO THAT PART OF THE NORTH HALF OF THE SOUTHEAST QUARTER OF THE NORTHWEST QUARTER OF SECTION TWENTY-NINE, TOWNSHIP FORTY-ONE NORTH, RANGE THIRTEEN, EAST OF THE THIRD PRINCIPAL MERIDIAN, LYING WEST OF THE SOUTHWESTERLY LINE OF THE CHICAGO, MILWAUKEE AND ST. PAUL RAILROAD, AS ESTABLISHED BY DEED RECORDED OCTOBER 17, 1872 AS DOCUMENT NO. 62678, AND ALSO WEST OF THE EASTERLY 60.0 FT. ACQUIRED BY TOWNSHIP DEDICATION, MAY 21, 1907, FOR LEHIGH AVENUE, BOUNDED AND DESCRIBED AS FOLLOWS: COMMENCING AT THE INTERSECTION OF A LINE 132.0 FT. NORTH OF AND PARALLEL TO THE SOUTH LINE OF THE NORTH HALF OF THE SOUTHEAST QUARTER OF THE NORTHWEST QUARTER OF SAID SECTION TWENTY-NINE, AND THE SOUTHWESTERLY LINE OF SAID LEHIGH AVENUE, SAID LINE BEING 60.0 FT. SOUTHWESTERLY OF AND PARALLEL TO THE SOUTHWESTERLY LINE OF SAID CHICAGO, MILWAUKEE AND ST. PAUL RAILROAD; THENCE WEST ALONG SAID 132.0 FT. NORTH PARALLEL LINE A DISTANCE OF 100.0 FT. TO A POINT; THENCE SOUTH ON A LINE PARALLEL TO THE WEST LINE OF SAID SECTION TWENTY-NINE HAVING AN ASSUMED BEARING OF SOUTH 00 DEGREES-27'-07" EAST A DISTANCE OF 65.0 FT. TO THE POINT OF BEGINNING; THENCE FROM SAID POINT OF BEGINNING CONTINUING SOUTH 00 DEGREES-27'-07" EAST A DISTANCE OF 67.0 FT. TO THE SOUTH LINE OF THE NORTH HALF OF THE SOUTHEAST QUARTER OF THE NORTHWEST QUARTER OF SAID SECTION TWENTY-NINE; THENCE WEST ALONG SAID SOUTH LINE OF THE NORTH HALF A DISTANCE OF 10.0 FT.; THENCE NORTH 00 DEGREES-27'-07" WEST A DISTANCE OF 67.14 FT.; THENCE NORTH 89 DEGREES-32'-53" EAST A DISTANCE OF 10.0 FT. TO THE POINT OF BEGINNING, ALL IN COOK COUNTY, ILLINOIS. 27 EASEMENT FOR CONSTRUCTION STAGING AREA THAT PART OF THE NORTH HALF OF THE SOUTHEAST QUARTER OF THE NORTHWEST QUARTER OF SECTION TWENTY-NINE, TOWNSHIP FORTY-ONE NORTH, RANGE THIRTEEN, EAST OF THE THIRD PRINCIPAL MERIDIAN, LYING WEST OF THE SOUTHWESTERLY LINE OF THE CHICAGO, MILWAUKEE AND ST. PAUL RAILROAD, AS ESTABLISHED BY DEED RECORDED OCTOBER 17, 1872 AS DOCUMENT NO. 62678, AND ALSO WEST OF THE EASTERLY 60.0 FT. ACQUIRED BY TOWNSHIP DEDICATION, 14AY 21, 1907, FOR LEHIGH AVENUE, BOUNDED AND DESCRIBED AS FOLLOWS: COMMENCING AT THE INTERSECTION OF A LINE 132.0 FT. NORTH OF AND PARALLEL TO THE SOUTH LINE OF THE NORTH HALF OF THE SOUTHEAST QUARTER OF THE NORTHWEST QUARTER OF SAID SECTION TWENTY-NINE, AND THE SOUTHWESTERLY LINE OF SAID LEHIGH AVENUE, SAID LINE BEING 60.0 FT. SOUTHWESTERLY OF AND PARALLEL TO THE SOUTHWESTERLY LINE OF SAID CHICAGO, MILWAUKEE AND ST. PAUL RAILROAD; THENCE WEST ALONG SAID 132.0 FT. NORTH PARALLEL LINE A DISTANCE OF 100.0 FT. TO A POINT; THENCE SOUTH ON A LINE PARALLEL TO THE WEST LINE OF SAID SECTION TWENTY-NINE HAVING AN ASSUMED BEARING OF SOUTH 00 DEGREES-27'-07" EAST A DISTANCE of 65.0 FT. TO A POINT; THENCE SOUTH 89 DEGREES-32'-53" WEST A DISTANCE OF 32.0 FT. TO THE POINT OF BEGINNING; THENCE FROM SAID POINT OF BEGINNING SOUTH 89 DEGREES-32'-53" WEST A DISTANCE OF 120.0 FT.; THENCE NORTH 00 DEGREES-27'-07"- WEST A DISTANCE OF 35.0 FT.; THENCE NORTH 89 DEGREES-32'-53" EAST A DISTANCE OF 120.0 FT.; THENCE SOUTH 00 DEGREES-27'-07" EAST A DISTANCE OF 35.0 FT. TO THE POINT OF BEGINNING, ALL IN COOK COUNTY, ILLINOIS. 28 EXHIBIT B (PLAT OF SURVEY AND/OR SITE PLAN TO BE INSERTED BY LESSEE, ROGERS RADIOCALL, INC.) 29 EXHIBIT C Liens and encumbrances to which the Premises and the Easement Areas are subject: (a) Current general real estate taxes not yet due and payable; and (b) Mortgage dated December 1, 1976 recorded December 10, 1976 with the Recorder of Deeds of Cook County, Illinois, as Document 23743556, as amended and assigned, and the following related security documents: Assignment of Rents recorded as Document 23743557, as amended and assigned, and Financing Statement filed as Document 76 U 65191. 30 CONSENT TO SITE AGREEMENT BY LESSOR'S BENEFICIARIES For and in consideration of Ten Dollars (S10.00) and other valuable consideration, the receipt, adequacy and sufficiency of which is hereby acknowledged, DAVID UNGER and HENRY M. MAUTNER, being the beneficiaries under the provisions of the Trust Agreement dated September 15, 1976 and known as Trust No. 39340, pursuant to which AMERICAN NATIONAL RANK AND TRUST COMPANY OF CHICAGO, the Lessor under that certain "Site Agreement No. 41-Niles, Illinois" dated April 8 , 1987 ("Site Agreement'), is Trustee, hereby recognize and consent to the terms of the Site Agreement; and agree that they will not take any action or suffer any action to be taken which does in any way impair or limit the performance by the Lessor (under the Site Agreement) of the Lessor's obligations under the Site Agreement, or which does in any way impair or limit the exercise by the Lessee (under the Site Agreement) of the Lessee's rights under the Site Agreement. The provisions hereof shall be binding upon the aforesaid beneficiaries and their respective heirs, executors, administrators, personal representatives, successors and assigns. It is specifically understood and agreed by Lessee, as confirmed by Lessee's execution of the Site Agreement to which this Consent is attached, that by executing this Consent the undersigned (a) do not assume or agree to perform any duties or obligations of Lessor under such Site Agreement, or assume any liability resulting from the failure of the Lessor to perform any such duties or obligations, all such obligations and liability being hereby expressly disclaimed by the undersigned, and (b) do not assume any personal liability for breach by the undersigned of any of the covenants contained in this Consent, except for injunctive relief as described below. By executing the Site Agreement to which this Consent is attached, Lessee agrees that Lessee's sole and exclusive remedy against the undersigned for any breach by them of their covenants under this Consent shall be to seek injunctive relief restraining the conduct by the undersigned which constitutes such breach by the undersigned, and in no event shall the undersigned be subject to any claim for monetary damages or financial relief on account of any such acts, nor shall any such relief be granted, all such claims for monetary damages and financial relief being hereby unconditionally and irrevocably waived by Lessee. However, the breach by any of the undersigned of any of the covenants contained in this Consent shall constitute a breach by the Lessor of its obligations under the Site Agreement. IN WITNESS WHEREOF, the aforesaid beneficiaries have executed this instrument on the 8th day of April, 1987. DAVID UNGER HENRY MAUTNER 31 NOTARY ACKNOWLEDGEMENT FOR BENEFICIARY OF LESSOR STATE OF ILLINOIS) ) SS. COUNTY OF ) 1, Peter B. Loughman, a Notary Public in and for the said County and State aforesaid DO HEREBY CERTIFY that the foregoing instrument was acknowledged before me this April 8, 1987 by DAVID UNGER, personally known to me to be the individual who executed the above instrument. Notary Public My Commision Expires: NOTARY ACKNOWLEDGEMENT FOR BENEFICIARY OF LESSOR STATE OF ILLINOIS ) ) SS. COUNTY OF COOK ) I, Peter B. Loughman, a Notary Public in and for the said County and State aforesaid DO HEREBY CERTIFY that the foregoing instrument was acknowledged before me this April 8, 1987 by HENRY M. MAUTNER, personally known to me to be the individual who executed the above instrument. 32 INDUSTRIAL BUILDING LEASE INDEX
Page I. Grant and Term . . . . . . . . . . . . . . . . 1 1.0 Grant . . . . . . . . . . . . . . . . . . . . . 1 1.1 Term . . . . . . . . . . . . . . . . . . . . . . 1 II. Possession . . . . . . . . . . . . . . . . . . . 1 2.0 Possession . . . . . . . . . . . . . . . . . . . 1 III. Purpose . . . . . . . . . . . . . . . . . . . . 1 3.0 Purpose . . . . . . . . . . . . . . . . . . . . 1 3.1 Uses Prohibited . . . . . . . . . . . . . . . . 1 3.2 Prohibition of Use . . . . . . . . . . . . . . . 1 IV. Rent . . . . . . . . . . . . . . . . . . . . . . 2 4.0 Rent . . . . . . . . . . . . . . . . . . . . . . 2 4.1 Interest on Late Payments. . . . . . . . . . . . 2 V. Impositions . . . . . . . . . . . . . . . . . . 2 5.0 Payment By Tenant . . . . . . . . . . . . . . . 2 5.1 Alternative Taxes. . . . . . . . . . . . . . . . 2 5.2 Deposits . . . . . . . . . . . . . . . . . . . . 2 5.3 Evidence of Payment . . . . . . . . . . . . . . 2 5.4 Right to Contest . . . . . . . . . . . . . . . . 2 VI. Insurance . . . . . . . . . . . . . . . . . . . 2 6.0 Kinds and Amounts . . . . . . . . . . . . . . . 2 6.1 Form of Insurance . . . . . . . . . . . . . . . 3 6.2 Mutual Waiver of Subrogation Rights . . . . . . 3 VII. Damage or Destruction . . . . . . . . . . . . . 3 7.0 Tenant's Obligation to Rebuild . . . . . . . . . 3 7.1 Preconditions to Rebuilding . . . . . . . . . . 3 7.2 Payment for Rebuilding . . . . . . . . . . . . . 3 7.3 Excess Receipts by Depositary . . . . . . . . . 4 7.4 Failure to Rebuild . . . . . . . . . . . . . . . 4 VIII. Condemnation . . . . . . . . . . . . . . . . . . 4 8.0 Taking of Whole . . . . . . . . . . . . . . . . 4 8.1 Partial Taking . . . . . . . . . . . . . . . . . 4 IX. Maintenance and Repairs . . . . . . . . . . . . 4 9.0 Maintenance . . . . . . . . . . . . . . . . . . 4 9.1 Alterations . . . . . . . . . . . . . . . . . . 4 X. Assignment and Subletting . . . . . . . . . . . 4 10.0 Consent Required . . . . . . . . . . . . . . . . 4 10.1 Merger or Consolidation . . . . . . . . . . . . 5 10.2 Voting Control of Tenant . . . . . . . . . . . . 5 10.3 Other Transfer of Lease . . . . . . . . . . . . 5 XI. Liens and Encumbrances . . . . . . . . . . . . . 5 11.0 Encumbering Title . . . . . . . . . . . . . . . 5
33 11.1 Liens and Right to Contest . . . . . . . . . . . 5 XII. Utilities . . . . . . . . . . . . . . . . . . . 5 12.1 Utilities . . . . . . . . . . . . . . . . . . . 5 XIII. Indemnity and Waiver . . . . . . . . . . . . . . 5 13.0 Indemnity . . . . . . . . . . . . . . . . . . . 5 13.1 Waiver of Certain Claims . . . . . . . . . . . . 5 XIV. Rights Reserved to Landlord . . . . . . . . . . 6 14.1 Rights Reserved to Landlord . . . . . . . . . . 6 XV. Quiet Enjoyment . . . . . . . . . . . . . . . . 6 15.0 Quiet Enjoyment . . . . . . . . . . . . . . . . 6 XVI. Subordination or Superiority . . . . . . . . . . 6 16.0 Subordination or Superiority . . . . . . . . . . 6 XVII. Surrender . . . . . . . . . . . . . . . . . . . 6 17.0 Surrender . . . . . . . . . . . . . . . . . . . 6 17.1 Removal of Tenant's Property . . . . . . . . . . 6 17.2 Holding Over . . . . . . . . . . . . . . . . . . 6 XVIII. Remedies . . . . . . . . . . . . . . . . . . . . 7 18.0 Defaults . . . . . . . . . . . . . . . . . . . . 7 18.1 Remedies Cumulative . . . . . . . . . . . . . . 8 18.2 No Waiver . . . . . . . . . . . . . . . . . . . 8 18.3 Confession of Judgment . . . . . . . . . . . . . 8 XIX. Security Deposit . . . . . . . . . . . . . . . . 8 19.0 Security Deposit . . . . . . . . . . . . . . . . 8 XX. Miscellaneous . . . . . . . . . . . . . . . . . 9 20.0 Tenant's Statement . . . . . . . . . . . . . . . 9 20.1 Estoppel Certificates . . . . . . . . . . . . . 9 20.2 Landlord's Right to Cure . . . . . . . . . . . . 9 20.3 Amendments Must be in Writing . . . . . . . . . 9 20.4 Notices . . . . . . . . . . . . . . . . . . . . 9 20.5 Short Form Lease . . . . . . . . . . . . . . . . 9 20.6 Time of Essence . . . . . . . . . . . . . . . . 9 20.7 Relationship of Parties . . . . . . . . . . . . 9 20.8 Captions . . . . . . . . . . . . . . . . . . . . 9 20.9 Severability . . . . . . . . . . . . . . . . . . 9 20.10 Law Applicable . . . . . . . . . . . . . . . . . 9 20.11 Covenant Binding on Successor . . . . . . . . . 9 20.12 Brokerage . . . . . . . . . . . . . . . . . . . 9 20.13 Landlord Means Owner . . . . . . . . . . . . . 10 20.14 Lender's Requirements . . . . . . . . . . . . 10 20.15 Signs . . . . . . . . . . . . . . . . . . . . 10 XXI. Exculpatory Clause . . . . . . . . . . . . . . 11
34 INDUSTRIAL BUILDING LEASE THIS LEASE is made this 18th day of November, 1976 by and between American National Bank & Trust Company of Chicago, not personally but solely as Trustee under Trust Agreement dated September 15, 1976, (hereinafter sometimes referred to as "Landlord") and Midwesco-Enterprise, Inc. an Illinois corporation (hereinafter sometimes referred to as "Tenant"), who hereby mutually covenant and agree as follows: I. GRANT AND TERM 1.0 Grant. Landlord for and in consideration of the rents herein reserved and the covenants and agreements herein contained on the part of the Tenant to be performed, hereby lets from Landlord, the real estate consisting of approximately 353,498 square feet in area commonly known as 7720 N. Lehigh Avenue, Niles, Illinois, and legally described on an exhibit which is attached hereto, identified as Exhibit A, and made a part hereof by this reference, together with all improvements now located thereon (consisting of approximately 107,000 square feet in floor area), or to be located thereon during: the term of this Lease, together with all appurtenances belonging to or in any way pertaining to the said premises (such real estate, improvements and appurtenances hereinafter sometimes jointly or severally, as the context requires, referred to as "Leased Premises"). 1.1 Term. The term of this Lease shall commence on December 10, 1976 (hereinafter sometimes referred to as "Commencement Date") and shall end on December 31, 2001, unless sooner terminated as herein set forth. II. POSSESSION 2.0 Possession. Except as otherwise expressly provided herein (or written instrument signed by Landlord or Landlord's agent or Landlord's beneficiary, beneficiaries or their assent if Landlord is an Illinois land trust) Landlord shall deliver possession of the Leased Premises to Tenant on or before the Commencement Date in their condition as of the execution and delivery hereof, reasonable wear and tear excepted. If Landlord gives possession prior to the Commencement Date to enable Tenant to fit the Leased Premises to its use, such occupancy shall be subject to all the terms and conditions of this Lease (except that Tenant shall not be required to pay rent during such occupancy). If Landlord shall be unable to deliver possession of the Leased Premises on the Commencement Date by reason of the fact that work required to be done by Landlord hereunder, if any, has not been completed for any reason, or because a prior tenant has failed to deliver up possession of the Leased Premises or for any other cause beyond the control of Landlord. Landlord shall not be subject to any liability for the failure to give possession on said date, nor shall the validity of this Lease or the obligations of Tenant hereunder be in any way affected. Under such circumstances, unless the delay is the fault of Tenant, rent and other charges hereunder shall not commence until the later of the date possession of the Leased Premises is given or the Commencement Date. III. PURPOSE 3.0 Purpose. The Leased Premises shall be used and occupied only for the purpose of manufacturing, sales, distribution, administration and warehouse purposes. 3.1 Uses Prohibited. Tenant will not permit the Leased Premises to be used in any 35 manner which would render the insurance thereon void. Tenant shall not use or occupy the Leased Premises, or permit the Leased Premises to be used or occupied, contrary to any statute, rule, order, ordinance, requirement or regulation applicable thereto: or in any manner which would violate any certificate of occupancy affecting the same; or which would cause structural injury to the improvements: or cause the value or usefulness of the Leased Premises, or any part thereof, to diminish; or which would constitute a public or private nuisance or waste. 3.2 Prohibition of Use. If the use of the Leased Premises should at any time during the Lease term be prohibited by law or ordinance or other governmental regulation, or prevented by injunction, this Lease shall not be thereby terminated nor shall Tenant be entitled by reason thereof to surrender the Leased Premises or to any abatement or reduction in rent, nor shall the respective obligations of the parties hereto be otherwise affected. IV. RENT 4.0 Rent. Beginning with the Commencement Date, Tenant shall pay to, or upon the order of David Unger and Henry Mautner until otherwise notified in writing by Landlord, as rent for the Leased Premises, at such place or places as Landlord may designate in writing from time to time and in default of such designation then at the office of the Landlord, c/o David Unger & Henry Mautner, 7720 N. Lehigh Avenue, Niles, Illinois, an annual rental of Two Hundred Twenty Thousand and no/100 Dollars (220,000.00), payable monthly in advance installments of Eighteen Thousand Three Hundred Thirty-Three and 34/100 Dollars ($18,333.34). If Tenant occupies the Leased Premises for the purpose of conducting business therein prior to the Commencement Date, Tenant shall pay rent on a pro rata basis from the date of occupancy to the Commencement Date. All payments of rent shall be made without deduction, set off, discount or abatement in lawful money of the United States. 4.1 Interest on Late Payments. Each and every installment of rent and each and every payment of other charges hereunder which shall not be paid when due, shall bear interest at the rate of twelve percent (12%) per annum from the date when the same is payable under the terms of this Lease until the same shall be paid. V. IMPOSITIONS 5.0 Payment by Tenant. Tenant shall pay as additional rent for the Leased Premises, all taxes and assessments, general and special, water rates and all other impositions, ordinary and extraordinary, of every kind and nature whatsoever, which may be levied, assessed or imposed upon the Leased Premises, or any part thereof, or upon any improvements at any time situated thereon, accruing or becoming due and payable during the term of the Lease ("Impositions"): provided, however, that the general taxes levied against the Leased Premises shall be prorated between Landlord and Tenant as of the Commencement Date for the first year of the Lease term and as of the expiration date of the Lease term for the last year of the Lease term (on the basis of Landlord's reasonable estimate thereof). Tenant may take the benefit of the provisions of any statute or ordinance permitting any assessment to be paid over a period of years, and Tenant shall be obligated to pay only those installments falling due during the term of this Lease. 36 5.1 Alternative Taxes. If at any time during the term of this Lease the method of taxation prevailing at the commencement of the term hereof shall be altered so that any new tax, assessment, levy, imposition or charge, or any part thereof, shall be measured by or be based in whole or in part upon the Lease or Leased Premises, or the rent, additional rent or other income therefrom and shall be imposed upon the Landlord, then all such taxes, assessments, levies, impositions or charges, or the part thereof, to the extent that they are so measured or based, shall be deemed to be included within the term Impositions for the purposes hereof to the extent that such Impositions would be payable if the Leased Premises were the only property of Landlord subject to such Impositions, and Tenant shall pay and discharge the same as herein provided in respect to the payment of Impositions. There shall be excluded from Impositions all federal and state income taxes, federal excess profit taxes, franchise, capital stock and federal or state estate or inheritance taxes of Landlord. 5.2 Deposits. As security for the obligations contained in this Article V, Tenant shall deposit monthly with Landlord, or such other entity as Landlord may designate, on the first day of each and every month of the Lease term, a sum equal to one-twelfth (1/12) of the last ascertainable amount (or at Landlord's election, a sum equal to one-twelfth (1/12) of the Landlord's estimate of the current amount of Impositions which monthly deposit shall be held by Landlord in such accounts as may be authorized by then current state or federal banking laws, rules or regulations and which monthly deposits shall be used as a fund to be applied, to the extent thereof to the payment of Impositions as the same become due and payable. The existence of said fund shall not limit or alter Tenant's obligation to pay Impositions (respecting which the fund was created; provided, however, that said fund shall be fully utilized for the payment of Impositions). The amount of the fund shall be re-adjusted annually, on the first day of the month after the tax bills showing the actual amount of the taxes (are issued in each year of the Lease term, to reflect the actual amount of Impositions). Tenant shall not be entitled to interest on said fund. 5.3 Evidence of Payment. Tenant shall deliver to Landlord duplicate receipts or photostatic copies thereof showing the payments of all Impositions, within thirty (30) days after the respective payments evidenced thereby. 5.4 Right to Contest. Tenant shall not be required to pay any Imposition or charge upon or against the Leased Premises, or any part thereof, or the improvements at any time situated thereon, so long as the Tenant shall in good faith and with due diligence, contest the same of the validity thereof by appropriate legal proceeding which shall have the effect of preventing the collection of the Imposition or charge so contested; provided that, pending any such legal proceedings Tenant shall give Landlord such security as may be deemed satisfactory to Landlord to insure payment of the amount of the Imposition or charge, and all interest and penalties thereon. If, at any time during the continuance of such contest, the Leased Premises or any part thereof is, in the judgment of Landlord, in imminent danger of being forfeited or lost, Landlord may use such security for the payment of such Imposition. VI. INSURANCE 6.0 Kinds and Amounts. As additional rent for the Leased Premises, Tenant shall procure and maintain policies of insurance, at its own cost and expense, insuring: (a) The improvements at any time situated upon the Leased Premises against loss or damage by fire, lightning, wind storm, hail storm, aircraft, vehicles, smoke, explosion, riot 37 or civil commotion as provided by the Standard Fire and Extended Coverage Policy other risks of direct physical loss as insured against and under Special Extended Coverage Endorsement. The insurance coverage shall be for not less than 100% of the full replacement cost of such improvements with all proceeds of insurance payable to Landlord. The full replacement cost of improvements shall be determined every three (3) years by an insurance appraiser selected by Landlord and paid for by Tenant. The insurance appraiser shall submit a written report of his appraisal and if said report shows that the improvements are not insured as herein required, Tenant shall promptly obtain such additional insurance as is required. (b) Landlord and Tenant from all claims, demands or actions for injury to or death of any person in an amount of not less than $500,000.00, for injury to or death of more than one person in any one occurrence in an amount of not less than $1,000,000.00, and for damage to property in an amount of not less than $200,000.00 made by, or on behalf of, any person or persons, firm or corporation arising from, related to or connected with the Leased Premises. Said insurance shall comprehend full coverage of the indemnity set forth in Section 13.0 hereof; (c) Item omitted from lease (d) Tenant from all workmen's compensation claims; and (e) Landlord and Tenant against breakage of all plate glass utilized in the improvements on the Leased Premises. (f) Landlord from loss of rents during the period while the Leased Premises are unrentable due to a fire or other Casualty (for the maximum period for which such insurance is available) but the purchase of such rent insurance shall not relieve Tenant from the primary obligation to pay rent during any such period of untenantability. (g) Flood insurance whenever, in the judgment of Landlord, such protection is necessary and it is available. 6.1 Form of Insurance. The aforesaid insurance shall be in companies and in form, substance and amount (where not stated above) satisfactory to Landlord and any mortgagee of Landlord, and shall contain standard mortgage clauses satisfactory to Landlord's mortgagee. The aforesaid insurance shall not be subject to cancellation except after at least thirty (30) days' prior written notice to Landlord and any mortgagee of Landlord. The original insurance policies (or certificates thereof satisfactory to Landlord) together with satisfactory evidence of payment of the premiums thereon, shall he deposited with Landlord at the Commencement Date and renewals thereof not less than thirty (30) days prior to the end of the term of each such coverage. If Landlord is an Illinois land trust the insurance referred to in subsections 6.0(b), (c) and (e) hereof shall also insure the beneficiary or beneficiaries thereof. 6.2 Mutual Waiver of Subrogation Rights. Whenever (a) any loss, cost, damage or expenses resulting from fire, explosion or any other casualty or occurrence is incurred by either of the parties to this Lease, or anyone claiming by, through or under it in connection with the Leased Premises, and (b) such party is then covered in whole or in part by insurance with respect to such 38 loss, cost damage or expense, then the party so insured hereby releases the other party from any liability it may have on account of such loss, cost, damage or expense to the extent of any amount recovered by reason of such insurance and waives any right of subrogation which might otherwise exist in or accrue to any person on account thereof, provided that such release of liability and waiver of the right of subrogation shall not be operative in any case where the effect thereof is to invalidate such insurance coverage or increase the cost thereof (provided that in the case of increased cost the other party shall have the right, within thirty (30) days following written notice, to pay such increased cost, thereupon keeping such release and waiver in full force and effect). VII. DAMAGE OR DESTRUCTION 7.0 Tenant's Obligation to Rebuild. In the event of damage to, or destruction of any improvements on the Leased Premises, or of the fixtures and equipment therein, by fire or other casualty, Tenant shall promptly, at its expense, repair, restore or rebuild the same to the condition existing prior to the happening of such fire or other casualty. Rent shall not be reduced or abated during the period of such repair, restoration or rebuilding even if the improvements are not tenantable. 7.1 Preconditions to Rebuilding. Before Tenant commences such repairing, restoration or rebuilding involving an estimated cost of more than Ten Thousand Dollars ($10.000.00), plans and specifications therefor, prepared by a licensed architect satisfactory to Landlord shall be submitted to Landlord for approval and Tenant shall furnish to Landlord (a) an estimate of the cost of the proposed work. certified to by said architect: (b) satisfactory evidence of sufficient contractor's comprehensive general liability insurance covering Landlord,builder's risk insurance. and workmen's compensation insurance; (c) a performance and payment bond satisfactory in form and substance to Landlord: and (d) such other security as Landlord , require to insure payment for the completion of all work free and clear of liens. 7.2 Payment for Rebuilding. Provided that the insurer does not deny liabilty as to the insureds, all sums arising by reason of loss under the insurance referred to in subsection 6.0(a), shall be available to Tenant for the work. Tenant shall depos it with the Depositary (as hereinafter defined) any excess cost of the work over the amount held by the Depositary as proceeds of the insurance within thirty (30) days from the date of the determination of the cost of the work by the architect in accordance with subsection 7.1(a) or, if the insurer has denied liability as to the insureds, then Tenant shall deposit the full amount of the work with the Depositary. Tenant shall diligently pursue the repair or rebuilding of the improvements in a good and workmanlike manner using only high quality union workmen and materials. The Depositary shall pay out construction funds from time to time on the written direction of the architect provided that the Depositary and Landlord shall first be furnished with waivers of lien, contractors, and subcontractors sworn statements and other evidence of cost and payments so that the Depositary can verify that the amounts disbursed from time to time are represented by completed and in-place work, and that said work is free and clear of mechanics liens. No payment made prior to the final completion of the work shall exceed ninety percent (90%) of the value of the work completed and in place from time to time. At all times the undisbursed balance remaining in the hands of Depositary shall be at least sufficient to pay for the rest of completion of the work free and clear of liens; any deficiency shall be paid into the Depositary by Tenant. Depositary, as used herein, shall be any first mortgagee of the Leased Premises, or the Landlord if there is no first mortgage of the Leased Premises or if such first mortgagee has refused to act as Depositary. 39 7.3 Excess Receipts by Depositary. Any excess of money received from insurance remaining with the Depositary after the repair or rebuilding of improvements, if there be no default by Tenant in the performance of the Tenant's covenants and agreements hereunder, shall be paid to Tenant. 7.4 Failure to Re-build. If Tenant shall not enter upon the repair or rebuilding of the improvements within a period of ninety (90) days after damage or destruction by fire or otherwise, and prosecute the same thereafter with such dispatch as may be necessary to complete the same within a reasonable period after said damage or destruction occurs, not to exceed one hundred eighty (180) days from the date of commencement of such repair or rebuilding, then, in addition to whatever other remedies Landlord may have either under this Lease, at law or in equity, the money received by and then remaining in the hands of the Depositary shall be paid in and retained by Landlord as security for the continued performance and observance by Tenant of the Tenant's covenants and agreements hereunder, or Landlord may terminate this Lease and then be paid and retain the amount so held as liquidated damages resulting from the failure on the part of Tenant to comply with the provisions of this Article. VIII. CONDEMNATION 8.0 Taking of Whole. If the whole of the Leased Premises shall be taken or condemned for a public or quasi-public use or purpose by any competent authority or if such a portion of the Leased Premises including, however, a portion of the improvements, shall be so taken that an a result thereof the balance cannot be used for the some purpose as expressed in Article Ill, then in either of such events, the Lease term shall terminate upon delivery of possession to the condemning authority, and any award, compensation or damages (hereinafter sometimes called the "award"), shall be paid to and be the sole property of Landlord whether such award shall be made as compensation for diminution of the value of the leasehold or the fee of the Leased Premises or otherwise and Tenant hereby assigns to Landlord all of Tenant's right, title and interest in and to any and all such award. Tenant shall continue to pay rent until the Lease term is terminated and any taxes and/or insurance premiums paid by Tenant, or any tax and insurance premium deposits with Landlord, shall be adjusted between the parties. 8.1 Partial Taking. If only a part of the Leased Premises shall be so taken or condemned, and as a result thereof the balance of the Leased Premises can be used for the same purpose as expressed in Article III, this Lease shall not terminate and Tenant, at its sole cost and expense, shall repair and restore the Leased Premises and all improvements thereon. Tenant shall promptly and diligently proceed to make a complete architectural unit of the remainder of the improvements first complying with the procedure set forth in Section 7.1. For such purpose the amount of the award relating to the improvements shall be deposited with the Depositary (as defined in Section 7.2 hereof) which shall disburse such award to apply on the cost of said repairing or restoration in accordance with the procedure set forth in Section 7.2. If Tenant does not make a complete architectural unit of the remainder of the improvements within a reasonable period after such taking or condemnation, not to exceed one hundred eighty (180) days then, in addition to whatever other remedies Landlord may have either under this Lease, at law or in equity, the money received by and then remaining in the custody of the Depositary shall. at Landlord's election be paid to and retained by Landlord as liquidated damages resulting from the failure of Tenant to comply with the provisions of this Section Any portion of such award as may not have to be expended for such repairing or restoration shall be paid to Landlord. There shall be no abatement or reduction in any 40 rental because of such taking or condemnation. IX. MAINTENANCE AND REPAIRS 9.0 Maintenance. Tenant shall keep and maintain the entire exterior and interior of the Leased Premises, specifically including without limitation, heating, ventilating and air conditioning equipment, the parking area and the roof, in good condition and repair, in full compliance with all health and police regulations in force and in conformity with the rules and regulations of fire underwriters or underwriters' fire prevention engineers. As used herein, each and every obligation of Tenant to keep, maintain and repair shall include, without limitation, all ordinary and extraordinary nonstructural and structural repairs and replacements. Tenant shall further keep and maintain the improvements at any time situated upon the Leased Premises and all sidewalks and areas adjacent thereto, safe, secure, clean and sanitary, specifically including but not by limitation, snow and ice clearance and planting and replacing flowers and landscaping, and conforming with the lawful and valid requirements of any governmental authority having jurisdiction over the Leased Premises. 9.1 Alterations. Tenant shall not create any openings in the roof or exterior walls, nor shall Tenant make any alterations or additions to the Leased Premises without Landlord's prior written consent. Tenant shall made all additions, improvements, alterations and repairs, nonstructural and structural, on the Leased Premises and on and to the appurtenances and equipment thereof, required by any such governmental authority or which may be made necessary by the act or neglect of any person, firm or corporation (public or private), including supporting the streets and alleys adjoining the Leased Premises. All work done pursuant to this Article IX shall be performed in accordance with Section 7.1. Upon completion of any work by or on behalf of Tenant, Tenant shall provide Landlord with such documents as Landlord may require (including, without limitation sworn contractor's statements and supporting lien waivers) evidencing payment in full for such work. X. ASSIGNMENT AND SUBLETTING 10.0 Consent Required. Tenant shall not, without Landlord's prior written consent, (a) assign, convey or mortgage this Lease or any interest under it; (b) allow any transfer thereof or any lien upon Tenant's interest by operation of any business; (c) sublet the Leased Premises or any part thereof, or (d) use by anyone other than Tenant. Landlord attests that it will not unreasonably withhold its consent to any or sublease, provided that if Tenant requests Landlord's consent to an assignment of the Lease or to a sublease of all or a substantial portion of Leased Premises, Landlord may, in lieu of granting such consent or reasonably withholding the same, terminate this Lease, effective on the effective date of such assignment or on the commencement date specified in the sublease, as the case may be, to which Landlord's consent is requested. No such termination shall be effective unless consented to in writing, by any first mortgagee. No permitted assignment or subletting shall relieve Tenant of Tenant's covenants and agreements hereunder and Tenant shall continue to be liable as a principal and not as a guarantor or surety, to the same extent as though no assignment or subletting had been made. 10.1 Merger or Consolidation. Tenant may, without Landlord's consent, assign this Lease to any corporation resulting from a merger or consolidation of the Tenant upon the following conditions: (a) that the total assets and net worth of such assignee after such consolidation or merger 41 shall be equal to or more than that of Tenant immediately prior to such consolidation or merger; (b) that Tenant is not at such time in default hereunder; (c) that such successor shall execute an instrument in writing fully assuming all of the obligations and liabilities imposed upon Tenant hereunder and deliver the same to Landlord. If the aforesaid conditions are satisfied, Tenant shall be discharged from any further liability hereunder. 10.2 Voting Control of Tenant. If Tenant is a corporation, the shares of which, at the time of the execution of this Lease or during the term hereof are or shall be held by fewer than 100 persons, firms, or corporations, and if at any time during the term of this Lease, the persons, firms or corporations who own a minority or controlling number of its shares at the time of the execution of this Lease or following Landlord's consent to a transfer of such shares, ceases to own such shares (except as a result of transfer by bequest or inheritance) and such cessation shall not first have been approved in writing, by Landlord then such cessation shall, at the option of Landlord, be deemed a default by Tenant under this Lease. 10.3 Other Transfer of Lease. Tenant shall not allow or permit any transfer of this Lease, or any interest hereunder, by operation of law, or convey, mortgage, pledge, or encumber this Lease or any interest herein. XI. LIENS AND ENCUMBRANCES 11.0 Encumbering Title. Tenant shall not do any act which shall in any way encumber the title of Landlord in and to the Leased Premises, nor shall the interest or estate of Landlord in the Leased Premises be in any way subject to any claim by way of lien or encumbrance, whether by operation of law or by virtue of any express or implied contract by Tenant. Any claim to, or lien upon, the Leased Premises arising from any act or omission of Tenant shall accrue only against the leasehold estate of Tenant and shall be subject and subordinate to the paramount title and rights of Landlord in and to the Leased Premises. 11.1 Liens and Right to Contest. Tenant shall not permit the Leased Premises to become subject to any mechanics', laborers' or materialmen's lien on account of labor or material furnished to Tenant or claimed to have been furnished to Tenant in connection with work of any character performed or claimed to have been performed on the Leased Premises by, or at the direction or sufferance of, Tenant; provided. however, that Tenant shall have the right to contest in good faith and with reasonable diligence, the validity of any such lien or claimed lien if Tenant shall give to Landlord such security as may be deemed satisfactory to Landlord to insure payment thereof and to prevent any sale, foreclosure, or forfeiture of the Leased Premises by reason of non-payment thereof; provided further, however, that on final determination of the lien or claim for lien. Tenant shall immediately pay any judgment rendered, with all proper costs and charges, and shall have the lien released and any judgment satisfied. XII. UTILITIES 12.0 Utilities. Tenant shall purchase all utility services, including but not limited to fuel, water, sewer and electricity from the utility or municipality providing such service and shall pay for such services when such payments are due. 42 XIII. INDEMNITY AND WAIVER 13.0 Indemnity. Tenant will protect, indemnify and save harmless Landlord (if Landlord is an Illinois land trust, the term "Landlord", for the purpose of this Article XIII only, shall include the Trustee, its agents, its beneficiary or beneficiaries and their agents) from and against all liabilities, obligations, claims, damages, penalties, causes of action, costs and expenses including without limitation, reasonable attorneys' fees and expenses) imposed upon or incurred by or asserted against Landlord by reason of (a) any accident, injury to or death of persons or loss of or damage to property occurring on or about the Leased Premises or any part thereof or the adjoining properties, sidewalks, curbs, streets or ways, or resulting from any act or omission of Tenant or anyone claiming by, through, or under Tenant; (b) any failure on the part of Tenant to perform or comply with any of the terms of this Lease: or (c) performance of any labor or services or the furnishing of any materials or other property in respect of the Leased Premises or any part thereof. In case any action, suit, or proceeding is brought against Landlord by reason of any such occurrence, Tenant will, at Tenant's expense, resist and defend such action, suit or proceeding, or cause the same to be resisted and defended by counsel approved by Landlord. 13.1 Waiver of Certain Claims. Tenant waives all claims it may have against Landlord for damages or injury to person or property sustained by Tenant or any persons claiming through Tenant or by any occupant of the Leased Premises, or by any other person, resulting from any part of the Leased Premises or any of its improvements, equipment or appurtenances becoming out of repair, or resulting from any accident on or about its improvements, equipment or appurtenances becoming out of repair, or resulting from any accident on or about the Leased Premises or resulting directly or indirectly from any act or neglect of any person, including Landlord to the extent permitted by law. This Section 13.1 shall include, but not by way of limitation, damage caused by water, snow, frost, steam, excessive heat or cold, sewage, gas, odors, or noise, or caused by bursting or leaking of pipes or plumbing fixtures, and shall apply equally whether any such damage results from the act or neglect of Tenant or of any other person, including Landlord to the extent permitted by law, and whether such damage be caused by or result from any thing or circumstance above mentioned or referred to, or to any other thing or circumstance whether of a like nature or of a wholly different nature. All personal property belonging to Tenant or any occupant of the Leased Premises that is in or on any part of the Leased Premises shall be there at the risk of Tenant or of such other person only, and Landlord shall not be liable for any damage thereto or for the theft or misappropriation thereof. XIV. RIGHTS RESERVED TO LANDLORD 14.0 Rights Reserved to Landlord. Without limiting any other rights reserved or available to Landlord under this Lease, at law or in equity, Landlord, on behalf of itself and its agents (and its beneficiary or beneficiaries and their agents if Landlord is an Illinois land trust) reserves the following rights, to be exercised at Landlord's election: (a) To change the street address of the Leased Premises; (b) To inspect the Leased Premises and to make repairs, additions or alterations to the Leased Premises; (c) To show the Leased Premises to prospective purchasers, mortgagees, or other 43 persons having a legitimate interest in viewing the same, and, at any time within one (1) year prior to the expiration of the Lease term, to persons wishing to rent the Leased Premises; (d) During the last year of the Lease term, to place and maintain the usual "For Rent" signs on the Leased Premises; and (e) During the last ninety (90) days of the Lease term, if during or prior to that time Tenant vacates the Leased Premises, to decorate, remodel, repair, alter or otherwise prepare the Leased Premises for new occupancy. Landlord may enter upon the Leased Premises for any and all of the said purposes and may exercise any and all of the foregoing rights hereby reserved without being deemed guilty of an eviction or disturbance of Tenant's use or possession of the Leased Premises, and without being liable in any manner to Tenant. XV. QUIET ENJOYMENT 15.0 Quiet Enjoyment. So long as Tenant is not in default under the covenants and agreements of this Lease, Tenant's quiet and peaceable enjoyment of the Leased Premises shall not be disturbed or interfered with by Landlord or by any person claiming by, through or under Landlord. XVI. SUBORDINATION OR SUPERIORITY 16.0 Subordination or Superiority. The rights and interest of Tenant under this Lease shall be subject and subordinate to any first mortgage or trust deed creating a first mortgage that may be placed upon the Leased Premises by Landlord and to any and all advances to be made thereunder, and to the interest thereon, and all renewals, replacements and extensions thereof, if the mortgagee or trustee named in said mortgages or trust deeds shall elect to subject and subordinate the rights and interest of Tenant under this Lease to the lien of its mortgage or deed of trust and shall agree to recognize this Lease of Tenant in the event of foreclosure if Tenant is not in default. Any such mortgagee or trustee may elect to give the rights and interest of Tenant under this Lease priority over the lien of its mortgage or deed of trust. In the event of either such election and upon notification by such mortgagee or trustee to Tenant to that effect, the rights and interest of Tenant under this Lease shall be deemed to be subordinate to, or to have priority over, as the case may be, the lien of said mortgage or trust deed, whether this Lease is dated prior to or subsequent to the date of said mortgage or trust deed. Tenant shall execute and deliver whatever instruments may be required for such purposes, and in the event Tenant fails so to do within ten (10) days after demand in writing. Tenant does hereby make, constitute and irrevocably appoint Landlord as its attorney in fact and in its name, place, and stead so to do. XVII. SURRENDER 17.0 Surrender. Upon the termination of this Lease whether by forfeiture, lapse of time or otherwise, or upon the termination of Tenant's right to possession of the Leased Premises, Tenant will at once surrender and deliver up the Leased Premises, together with all improvements thereon, to Landlord in good condition and repair, reasonable wear and tear excepted. Said improvements 44 shall include all plumbing, lighting, electrical, heating, cooling, and ventilating fixtures and equipment and other articles of personal property used in the operation of the Leased Premises (as distinguished from operations incident of the business of Tenant; articles of personal property incident to Tenant's business are hereinafter referred to as "Trade Fixtures"). All additions, hardware, non-Trade Fixtures and improvements, temporary or permanent, in or upon the Leased Premises placed there by Tenant shall become Landlord's property and shall remain upon the Leased Premises upon such termination of this Lease by lapse of time or otherwise, without compensation or allowance or credit to Tenant, unless Landlord requests their removal in writing at or before the time of such termination of this Lease. If Landlord so requests removal of said additions, hardware, non-Trade Fixtures and all improvements and Tenant does not make such removal at said termination of this Lease, or within ten (10) days after such request, whichever is later, Landlord may remove the same and deliver the same to any other place of business of Tenant or warehouse the same, and Tenant shall pay the cost of such removal, delivery and warehousing to Landlord on demand. 17.1 Removal of Tenant's Property. Upon the termination of this Lease by lapse of time, Tenant may remove Tenant's Trade Fixtures provided, however, that Tenant shall repair any injury or damage to the Leased Premises which may result from such removals. If Tenant does not remove Tenant's Trade Fixtures from the Leased Premises prior to the end of the term, however ended, Landlord may, at its option, remove the same and deliver the same to any other place of business of Tenant or warehouse the same, and Tenant shall pay the cost of such removal (including the repair of any injury or damage to the Leased Premises resulting from such removal), delivery and warehousing to Landlord on demand, or Landlord may treat such Trade Fixtures as having been conveyed to Landlord with this Lease as a Bill of Sale, without further payment or credit by Landlord to Tenant. 17.2 Holding Over. Any holding over by Tenant of the Leased Premises after the expiration of this Lease shall operate and be construed to be a tenancy from month to month only, at the same monthly rate of rent and other charges payable hereunder for the Lease term, or at the election of Landlord expressed in a written notice to Tenant, otherwise holding over shall constitute a renewal of the Lease for one (1) year at the same rental at which all of the covenants and agreements contained in this Lease. If Tenant continues to hold over any written demand by Landlord for possession at the expiration of the Lease or after termination by either of a month to month tenancy created pursuant to this Section, or after termination of the Lease or of double the rate of rent payable hereunder immediately prior to the expiration or other termination of the Lease of Tenant's right to possession. Nothing contained in this Section 17.2 shall be construed to give Tenant the right to hold over at any time and Landlord may exercise any and all remedies at law or in equity to recover possession of the Leased Premises. XVIII. REMEDIES 18.0 Defaults. Tenant further agrees that any one or more of the following events shall be considered events of default as said term is used herein, that is to any, if (a) Tenant shall be adjudged an involuntary bankrupt, or a decree or order approving, as properly filed, a petition or answer filed against Tenant asking recognition of Tenant under the Federal bankruptcy law as now or hereafter amended, or under the laws of any State, shall be entered, and any such decree or judgment or order shall not have been vacated or set 45 aside within sixty (60) days from the date of the entry or granting thereof; or (b) Tenant shall file or admit the jurisdiction of the court and the material allegations contained in, any petition in bankruptcy, or any petition pursuant or purporting to be pursuant to the Federal bankruptcy laws as now or hereafter amended, or Tenant shall institute any proceedings or shall give its consent to the institution of any proceedings for any relief of Tenant under any bankruptcy or insolvency laws or any laws relating to the relief of debtors, readjustment of indebtedness, reorganization, arrangements, composition or extension: or (c) Tenant shall make any assignment for the benefit of creditors or shall apply for or consent to the appointment of a receiver for Tenant or any of the property of Tenant; or (d) The Leased Premises are levied upon by any revenue officer or similar officer, or (e) A decree or order appointing a receiver of the property of Tenant shall be made and such decree or order shall not have been vacated or set aside within sixty (60) days from the date of entry or granting thereof, or (f) Tenant shall abandon the Leased Premises or vacate the same during the tem hereof; or (g) Tenant shall default in any monthly payments of rent or in any other payment required to be made by Tenant hereunder when due as herein provided and such default shall continue for ten (10) days after notice thereof in writing to Tenant.; or (h) Tenant shall fail to contest the validity of any lien or claimed lien and give security to Landlord to insure payment thereof, or having commenced to contest the same and having given such security, shall fail to prosecute such contest with diligence, or shall fail to have the some released and satisfy any judgment rendered thereon, and such default continues for ten (10) days after notice thereof in writing to Tenant; or (i) Tenant shall default in any of the other covenants and agreements herein contained to be kept, observed and performed by Tenant, and such default shall continue for thirty (30) days after notice thereof in writing to Tenant; or (j) Tenant shall repeatedly be late in the payment of rent or other charges required to be paid hereunder or shall repeatedly default in the keeping, observing, or performing of any other covenants or agreements herein contained to be kept,. observed or performed by Tenant (provided notice of such payment or other defaults shall have been given to Tenant, but whether or not Tenant shall have timely cured any such payment or other defaults of which notice was given). Upon the occurrence of any one or more of such events of default, Landlord may at its election terminate this Lease or terminate Tenant's right to possession only, without terminating the Lease. Upon termination of this Lease or of Tenant's right to possession, Landlord may re-enter the Leased Premises with or without process of law using such force as may be necessary, and remove all persons, fixtures, and chattels therefrom and Landlord shall not be liable for any damages resultant therefrom. Upon termination of the Lease, or upon any termination of the Tenant's right to 46 possession without termination of the Lease, the Tenant shall surrender possession and vacate the Leased Premises immediately, and deliver possession thereof to the Landlord, and hereby grants to the Landlord the full and free right, without demand or notice of any kind to Tenant (except as hereinabove expressly provided for), to enter into and upon the Leased Premises in such event with or without process of law and to repossess the Leased Premises as the Landlord's former estate and to expel or remove the Tenant and any others who may be occupying or within the Leased Premises without being deemed in any manner guilty of trespass, eviction, or forcible entry or detainer without incurring any liability for any damage resulting therefrom and without relinquishing the Landlord's rights to rent or any other right given to the Landlord hereunder or by operation of law. Upon termination of the Lease, Landlord shall be entitled to recover as damages, all rent and other sums due and payable by Tenant on the date of termination, plus (1) an amount equal to the value of the rent and other sums provided herein to be paid by Tenant for the residue of the stated term hereof, less the fair rental value of the Leased Premises for the residue of the stated term (taking into account the time and expenses necessary to obtain a replacement tenant or tenants, including expenses hereinafter described relating to recovery of the premises, preparation for reletting and for reletting itself), and (2) the cost of performing any other covenants to be performed by Tenant. If the Landlord elects to terminate the Tenant's right to possession only, without terminating the Lease, the Landlord may, at the Landlord's option enter into the Leased Premises, remove the Tenant's signs and other evidences of tenancy, and take and hold possession thereof as hereinabove provided, without such entry and possession terminating the Lease or releasing the Tenant, in whole or in part, from the Tenant's obligations to pay the rent hereunder for the full term or from any other of its obligations under this Lease. Landlord may, but shall be under no obligation so to do, relet all or any part of the Leased Premises for such rent and upon terms that shall be satisfactory to Landlord (including the right to rent the Leased Premises for a term greater than that remaining under the Lease term, and the right to relet the Leased Premises as a part of a larger area, and the right to change the character of use made of the Leased Premises). For the purpose of such reletting, Landlord may decorate or make any repairs, changes, alterations or additions in or to the Leased Premises that may be convenient. If Landlord does not relet the Leased Premises, Tenant shall pay to Landlord on demand damages equal to the amount of the rent, and other sums provided herein to be paid by Tenant for the remainder of the Lease term. If the Leased Premises are relet and a sufficient sum shall not be realized from such reletting after paying all of the expenses of such decoration, repairs, changes, alternations, additions, the expenses of such reletting and the collection of the rent accruing therefrom including, but not by way of limitation, attorneys' fees and brokers' commissions, to satisfy the rent herein provided to be paid for the remainder of the Lease term. Tenant shall pay to Landlord on demand any deficiency and Tenant agrees that Landlord may file suit to recover any sums falling due under the terms of this Section from time to time. If Tenant shall default under subsection (1) hereof, and if such default cannot with due diligence be cured within a period of thirty (30) days, and if notice thereof in writing shall have been given to Tenant, and if Tenant promptly commences to eliminate the cause of such default, then Landlord shall not have the right to declare said term ended by reason of such default or to repossess the Leased Premises without terminating the Lease so long as Tenant is proceeding diligently and with reasonable dispatch to take all steps and do all work required to cure such default and does so cure such default, provided, however, that the curing of any default in such manner shall not be construed to limit or restrict the right of Landlord to declare the term ended or to repossess without terminating the Lease, and to enforce all of its right and remedies hereunder for any other default no so cured. 18.1 Remedies Cumulative. No remedy herein or otherwise conferred upon or reserved to Landlord shall be considered to exclude or suspend any other remedy but the same shall be 47 cumulative and shall he in addition to every other remedy given hereunder, or now or hereafter existing at law or in equity or by statute, and every power and remedy given by this Lease to Landlord may be exercised from time to Lime and so often as occasion may arise or as may be deemed expedient 18.2 No Waiver. No delay or omission of Landlord to exercise any right or power arising from any default shall impair any such right or power or be construed to be a waiver of any such default or any acquiescence therein. No waiver of any breach of any of the covenants of this Lease shall be construed, taken or held to be a waiver of any other breach or waiver, acquiescence in or consent to any further or succeeding breach of the same covenant. The acceptance by Landlord of any payment of rent or other charges hereunder after the termination by Landlord of this Lease or of Tenant's right to possession hereunder shall not. in the absence of agreement in writing to the contrary by Landlord, be deemed to restore this Lease or Tenant's right to possession hereunder, as the case may be, but shall be construed as a payment on account, and not in satisfaction, of damages due from Tenant to Landlord. Section 18.3 Omitted XIX. SECURITY DEPOSIT 19.0 Security Deposit. To secure the faithful performance by Tenant of all of the covenants, conditions and agreements in this Lease set forth and contained on the part of the Tenant to be fulfilled, kept, observed and performed, including, but without limiting the generality of the foregoing, such covenants, conditions and agreements in this Lease which become applicable upon the termination of the same by re-entry or otherwise, Tenant has deposited herewith the sum of $55,000 with David Unger & Henry Mautner as beneficiaries of Landlord("Agent") as a Security Deposit on the understanding: (a) that such deposit or any part or portion thereof not previously applied, or from time to time, such one or more parts or portions thereof, may be applied to the curing of any default that may then exist, without prejudice to any other remedy or remedies which the Landlord may have on account thereof, and upon such application Tenant shall pay Agent on demand the amount so applied which shall be added to the Security Deposit so the same may be restored to its anginal amount; (b) that should the Leased Premises be conveyed by Landlord or should Agent cease to be the beneficiaries of Landlord, the deposit or any portion thereof not previously applied may be turned over to Landlord's grantee or the new agent, as the case may be, and if the same be turned over as aforesaid, the Tenant hereby releases Landlord and Agent from any and all liability with respect to the deposit and/or its application or return, and the Tenant agrees to look to such grantee or agent, as the case may be, for such application or return; (c) that Landlord shall have no personal liability with respect to said sum and Tenant shall look exclusively to Agent or its successors pursuant to subparagraph (b) hereof for return of said sum on the termination of this lease; (d) that Agent or its successor shall not be obligated to hold said deposit as a separate fund, but on the contrary may commingle the same with its other funds; (e) that if Tenant shall faithfully fulfill, keep, perform and observe all of the covenants, conditions, and agreement in this Lease set forth and contained on the part of Tenant to be fulfilled, kept, performed and observed, the sum deposited or the part or portion thereof not previously applied, shall be returned to the Tenant without interest no later than thirty (30) days after the expiration of the term of this Lease or any renewal or extension thereof, provided Tenant has vacated the Leased Premises and surrendered possession thereof to the Landlord at the expiration of said term or any extension or renewal thereof as provided herein; and (f) that Agent on behalf of itself and its successor, reserves the right, at its 48 sole option, to return to Tenant said deposit or what may then remain thereof, at any time prior to the date when Agent, or its successors is obligated hereunder to return the same, but said return shall not in any manner be deemed to be a waiver of any default of the Tenant hereunder then existing nor to limit or extinguish any liability of Tenant hereunder. XX. MISCELLANEOUS 20.0 Tenants's Statement. Tenant shall furnish Landlord annually within ninety (90) days after the end of each of Tenant's fiscal years a copy of its annual report and certified statement. It is mutually agreed that Landlord may deliver a copy of such statements to the mortgagee, but otherwise Landlord shall treat such statements and information contained therein as confidential. 20.1 Estoppel Certificates. Tenant shall at any time and from time to time upon not less than ten (10) days prior written request from Landlord execute, acknowledge and deliver to Landlord, in form reasonably satisfactory to Landlord and, or Landlord's mortgagee, a written statement certifying, if true, that Tenant has accepted the Lease Premises that this Lease is unmodified and in full force and effect or if there have been modifications that the same is in full force and effect as modified and stating the modifications), that the Landlord is not in default hereunder, the rate to which the rental and other charges have been paid in advance, if any, or such other accurate certification as may reasonably be required by Landlord or Landlord's mortgagee, and agreeing to give copies to any mortgagee of Landlord of all notices by Tenant to Landlord. It is intended that any such statement delivered pursuant to this subsection may be relied upon by any prospective purchaser or mortgagee of the Leased Premises. 20.2 Landlord's Right to Cure. Landlord may, but shall not be obligated to, cure any default by Tenant (specifically including but not, by way of limitations. Tenant's failure to obtain insurance, make repairs, or satisfy lien claims, and whenever Landlord so elects, all costs and expenses paid by Landlord in curing such default, including without limitation reasonable attorneys' fees, shall be so much additional rent due on the next rent date after such payment together with interest (except in the case of said attorneys' fees) at the highest rate then payable by Tenant in the state in which the Leased Premises are located or in the absence of such a maximum rate at the rate of twelve percent (12%) per annum, from the date of the advance to the date of repayment by Tenant to Landlord. 20.3 Amendment Must be in Writing. None of the covenants, terms or conditions of this Lease, to be kept and performed by either party, shall in any manner be altered, waived, modified, changed or abandoned except by a written instrument, duly signed, acknowledged and delivered by the other party. 20.4 Notices. All notices to or demands upon Landlord or Tenant desired or required to be given under any of the provisions hereof shall be in writing. Any notices or demands from Landlord to Tenant shall be deemed to have been duly and sufficiently given if a copy thereof has been mailed by United States registered or certified mail in an envelope properly stamped and addressed to Tenant as follows: Midwesco- Enterprise, Inc., 7720 N. Lehigh Avenue, Niles, Illinois, attn: David Unger, President, or at such address as Tenant may theretofore have furnished by written notice to Landlord, and any notices or demands from Tenant to Landlord shall be deemed to have been duly and sufficiently given if mailed by United States registered or certified mail in an envelope properly stamped and addressed to Landlord as follows c/o David Unger c/o Midwesco-Enterprise, 49 Inc., address above or at such other address as Landlord may theretofore have furnished by written notice to Tenant with a copy to any first mortgagee of the Leased Premises as to the identity and address of which Tenant shall have received written notice. The effective date of such notice shall be one (1) day after delivery of the same to the United States Postal Service. 20.5 Short Form Lease. This Lease shall not be recorded, but the parties agree, at the request of either of them, to execute a Short Form Lease for recording, containing the name of the parties, the legal description and the term of the Lease. 20.6 Time of Essence. Time is of the essence of this Lease, and all provisions herein relating thereto shall be strictly construed. 20.7 Relationship of Parties. Nothing contained herein shall be deemed or construed by the parties hereto, nor by any third party, as creating the relationship of principal and agent or of partnership, or of joint venture by the parties hereto, it being understood and agreed that no provision contained in this Lease nor any acts of the parties hereto shall be deemed to create any relationship other than the relationship of Landlord and Tenant. 20.8 Captions. The captions of this Lease are for convenience only and are not to be construed as part of this Lease and shall not be construed as defining or limiting in any way the scope or intent of the provisions hereof. 20.9 Severability. If any term or provision of this Lease shall to any extent be held invalid or unenforceable, the remaining terms and provisions of this Lease, at the option of the Landlord, shall not be affected thereby, but each term and provision of this Lease shall be valid and be enforced to the fullest extent permitted by law. 20.10 Law Applicable. This Lease shall be construed and enforced in accordance with the laws of the state where the Leased Premises are located. 20.11 Covenants Binding on Successors. All of the covenants, agreements, conditions and undertakings contained in this Lease shall extend and inure to and be binding upon the heirs, executors, administrators, successors and assigns of the respective parties hereto, the same as if they were in every case specifically named, and wherever in this Lease reference is made to either of the parties hereto, it shall be held to include and apply to, wherever applicable, the heirs, executors, administrators, successors and assigns of such party. Nothing herein contained shall be construed to grant or confer upon any person or persons, firm, corporation or governmental authority, other than the parties hereto, their heirs, executors, administrators, successors and assigns, any right, claim or privilege by virtue of any covenant, agreement, condition or undertaking in this Lease contained. 20.12 Brokerage. Tenant warrants that it has had no dealings with any broker or agent in connection with this Lease. Tenant covenants of pay, hold harmless and indemnify Landlord from and against any and all cost, expense or liability for any compensation, commissions and charges claimed by any other broker or other agent with respect to this Lease or the negotiation thereof. 20.13 Landlord Means Owner. The term "Landlord" as used in the Lease, so far as covenants of obligations on the part of Landlord are concerned, shall be limited to mean and include only the owner or owners at the time in question of the fee of the Leased Premises, and in the event 50 of any transfer of the title to such fee, Landlord herein named (and in case of any subsequent transfer or conveyances, the then grantor) shall be automatically freed and relieved, from and after the date of such transfer or conveyance, of all liability as respects the performance of any covenants or obligations on the part of Landlord contained in this Lease thereafter to be performed, provided that any funds in the hands of such Landlord or the then grantor at the time of such transfer, in which Tenant has an interest, shall be turned over to the grantee, and any amount then due and payable to Tenant by Landlord or the then grantor under any provisions of this Lease, shall be paid to Tenant. Paragraph 20.14 Omitted. 20.15 Signs. Tenant shall install no exterior sign without Landlord's prior written approval of detailed plans and specifications therefor. 20.16 For purposes of this Lease, the term.'Leased Premises" shall include the personal property and chattels described on Exhibit B hereto. At all times during the Term of this Lease, Tenant, at its sole expense, shall maintain such personal property and chattels in good working order and condition and shall keep the same insured against loss by fire and other casualties in amounts reasonably requested by Landlord and otherwise in accordance with the provisions of Article VI of this Lease. Such personal property and chattels shall at all times remain the sole property of Landlord, subject to the right of Tenant to use the same in accordance with the provisions of this Lease. The obligation of Tenant to maintain such personal property and chattels shall include the obligation to repair and replace the same during the Term as necessary. On the termination of the Term of this Lease, whether by lapse of time or otherwise, Tenant shall return such personal property and chattels to Landlord in the same condition as existing on the date hereof, ordinary wear and tear excepted. The rights and interest of Tenant in and to such personal property and chattels shall be subject and subordinate to the lien of any first mortgage affecting the Leased Premises and to the lien granted by Landlord pursuant to any Security Agreement applicable to such personal property and chattels and to all advances made thereunder and interest thereon, and all renewals, replacements and extensions thereof. If Landlord is an Illinois Land Trust, the following Section 21.0 shall be included in this Lease: 21.0 Exculpatory Clause. This Lease is executed by American National Bank & Trust Company, not personally but as Trustee as aforesaid, in the exercise of and power and authority conferred upon and vested in it as such Trustee, and under the express direction of the beneficiaries of a certain Trust Agreement dated September 15, 1976, and known as Trust Number 39340 to all provisions of which Trust Agreement this Lease is expressly made subject. It is expressly understood and agreed that nothing in this Lease contained shall be construed as creating any liability whatsoever against said Trustee or said beneficiaries, and in particular without limiting the generality of the foregoing, there shall be no personal liability to pay any indebtedness accruing hereunder or to perform any covenant, either express or implied herein contained, to keep, preserve or acquiesce any property of said Trust, and that all personal liability of said Trustee (and said beneficiaries to the extent permitted by law), of every sort, if any, is hereby expressly waived by Tenant, and by every person now or hereafter claiming any right or security hereunder; and that so far as the parties hereto are concerned the owner of any indebtedness of liability accruing hereunder 51 shall look solely to the Trust Estate from time to time subject to the provisions of said Trust Agreement for the payment thereof. It is further understood and agreed that the said Trustee has no agents or employees and merely holds naked legal title to the property herein described and has no control over the management thereof or the income therefrom and has no knowledge respecting rentals, leases or other factual matter with respect to said premises, except as represented to it by the beneficiary or beneficiaries of said Trust. IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease the day and year first above written. AMERICAN NATIONAL BANK & TRUST COMPANY OF CHICAGO, as Trustee of Trust #39340 (If corporation, affix seal here) Landlord MIDWESCO-ENTERPRISE, INC., an Illinois corporation (if corporation. affix seal here) Tenant ACKNOWLEDGMENTS (If Tenant is an Individual or Partnership) STATE OF SS COUNTY OF SS I......................................................., a Notary Public in and for said County, in the State aforesaid, do hereby certify that......................................... , personally known to me to be the same person(s) whose name(s) is/are subscribed to the foregoing instrument, appeared before me this day in person and acknowledged that he/they signed, sealed, and delivered the said instrument as his/their free and voluntary act for the uses and purposes therein set forth. 52 GIVEN under my hand and Notarial Seal this day of 19___ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notary Public (If Tenant is a Corporation) STATE OF ILLINOIS SS COUNTY OF COOK I, Ruth A. Heinrich, a Notary Public in and for said County, in the State aforesaid, do hereby certify that David Unger, personally known to me to be the President of MIDWESCO-ENTERPRISE, INC, and Illinois corporation, duly licensed to transact business in the State of Illinois, and personally known to me to be the Secretary of said corporation and personally known to me to be the same persons whose names are subscribed to the foregoing instrument, appeared before me this day in person and severally acknowledged that they signed and delivered the said instrument as President and Secretary of said corporation, and caused the Corporate Seal of said corporation to be affixed thereto, pursuant to authority given by the Board of Directors of said corporation, as their free and voluntary act and as the free and voluntary act and deed of said corporation, for the uses and purposes therein set forth. GIVEN under my hand and Notarial Seal this 7th day of December, 1976. Ruth A. Heinrich Notary Public STATE OF ILLINOIS SS COUNTY OF COOK I, P. Johansen, a Notary Public in and for said County, in the State aforesaid. do hereby certify that J. M. Whelan, personally known to me to be the Vice President of American Bank & Trust Co. of Chicago, as Trustee of Trust #39340 and L. Woods, personally known to me to be the Asst. Secretary of thereof and personally known to me to be the same persons whose names are subscribed to the foregoing instrument, appeared before me this day in person and severally acknowledged that they signed and delivered the said instrument as Vice President and Asst. Secretary thereof, and caused the Corporate Seal thereof to be affixed thereto, pursuant to authority given by the Board of Directors thereof, as their free and voluntary act and as the free and voluntary act and deed thereof, for the uses and purposes therein set forth. GIVEN under my hand and Notarial Seal this Dec 08 1976. Notary Public 53 (If Landlord is an Individual or Partnership) STATE OF SS COUNTY OF I............................................................................ ............. a Notary Public in and for said County. in the State aforesaid, do hereby certify that............................................. , personally known to me to be the same person(s) whose name(s) is/are subscribed to the foregoing instrument, appeared before me this day in person and acknowledged that he/they signed, sealed and delivered the said instrument as his/their free and voluntary act, for the uses and purposes therein set forth. GIVEN under my hand and Notarial Seal this .................. day of ...... ............................... Notary Public 54 EXHIBIT "A" LEGAL DESCRIPTION THAN THAT PART OF THE NORTH HALF OF THE SOUTHEAST QUARTER OF THE NORTHWEST QUARTER OF SECTION 29, TOWNSHIP 41 NORTH, RANGE 13 EAST OF THE 3RD PRINCIPAL MERIDIAN, LYING WEST OF THE WEST LINE OF THE CHICAGO, MILWAUKEE AND ST. PAUL RAILROAD, AS ESTABLISHED BY DEED RECORDED OCTOBER 17, 1872, AS DOCUMENT 62678, AND ALSO WEST OF THE EASTERLY 60 FEET ACQUIRED BY TOWNSHIP DEDICATION, MAY 21, 1907, FOR LEHIGH AVE., EXCEPT THE NORTH 33 FEET THEREOF, ALSO EXCEPT THE WEST 237.40 FEET THEREOF, ALSO EXCEPTING THAN THAT PORTION OF THE ABOVE DESCRIBED TRACT HERETOFORE CONVEYED TO THE PUBLIC SERVICE COMPANY OF NORTHERN ILLINOIS, DESCRIBED AS THAN THAT PART OF THE SOUTH 2 CHAINS, WEST OF THE WEST LINE OF THE CHICAGO, MILWAUKEE AND ST. PAUL RAILROAD RIGHT OF WAY IN THE NORTH 1/2 OF THE SOUTHEAST 1/4 OF THE NORTHWEST 1/4 OF SECTION 29, TOWNSHIP 41 NORTH, RANGE 13 EAST OF THE 3RD PRINCIPAL MERIDIAN, LYING EASTERLY OF A LINE PARALLEL TO THE WEST LINE OF SAID SECTION AND 100 FEET WEST OF THE INTERSECTION OF THE WESTERLY LINE OF LEHIGH AVE., AND THE NORTH LINE OF SAID TRACT, IN THE VILLAGE OF NILES, COOK COUNTY, ILLINOIS. EXHIBIT "B" 1. One Wright 2-ton crane 2. One Robbins and Meyers 2-ton crane 3. Three Manning, Maxwell and Moore 20-ton cranes 4. One Michigan 10-ton crane 5. One Able-Howe 20-ton crane 6. One Shaw-Box 10-ton crane 7. One each-50 horsepower and 15 horsepower Gardener Denver air compressors 8. One 30-ton Hydro Scale crane scale, and 9. One Columbus 30,000 pound platform floor scale EX-11 4 COMPUTATION OF PER SHARE EARNINGS 1 Exhibit 11 MFRI, INC. AND SUBSIDIARIES COMPUTATION OF PRIMARY EARNINGS PER COMMON SHARE
Year Ended Year Ended Year Ended January 31, 1997 January 31, 1996 January 31, 1995 ---------------- ---------------- ---------------- Net income $3,230,000 $2,373,000 $1,203,000 Weighted average number of common shares outstanding: Shares outstanding from beginning of period 4,524,000 4,529,000 4,289,000 Issuances of common stock 51,000 232,000 Acquisition of treasury stock (43,000) Common share equivalents: Assumed exercise of common stock options 52,000 14,000 15,000 ---------- ---------- ---------- Weighted average common and common share equivalents 4,627,000 4,543,000 4,493,000 ========== ========== ========== Net income per share $0.70 $0.52 $0.27 ========== ========== ==========
2 Exhibit 11 MFRI, Inc. and Subsidiaries Computation of Fully Diluted Earnings Per Common Share
Year Ended Year Ended Year Ended January 31, 1997 January 31, 1996 January 31, 1995 ---------------- ---------------- ---------------- Net income $3,230,000 $2,373,000 $1,203,000 Weighted average number of common shares outstanding: Shares outstanding from beginning of period 4,524,000 4,529,000 4,289,000 Issuances of common stock 51,000 232,000 Acquisition of treasury stock (43,000) Common share equivalents: Assumed exercise of common stock options 65,000 20,000 15,000 ---------- ---------- ---------- Weighted average common and common share equivalents 4,640,000 4,549,000 4,493,000 ---------- ---------- ---------- Net income per share $ 0.70 $ 0.52 $ 0.27 ========== ========== ==========
EX-21 5 SUBSIDIARIES OF MFRI 1 EXHIBIT 21 MFRI, Inc. has the following wholly-owned subsidiaries: 1. Midwesco Filter Resources, Inc. (Delaware corporation) 2. Perma-Pipe, Inc. (Delaware corporation) Subsidiaries which in the aggregate would not be a significant subsidiary have been omitted. EX-23 6 CONSENT OF DELOITTE & TOUCHE LLP 1 Exhibit 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 333-21951 of MFRI, Inc. on Form S-3 of our report dated April 18, 1997, appearing in the Annual Report on Form 10-K of MFRI, Inc. for the year ended January 31, 1997, and to the reference to us under the heading "Experts" in the Prospectus which is part of this Registration Statement. DELOITTE & TOUCHE LLP Chicago, Illinois April 30, 1997 EX-24 7 POWER OF ATTORNEY 1 EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned, being a director or officer, or both, of MFRI, INC., a Delaware corporation (the "Corporation"), does hereby constitute and appoint DAVID UNGER, HENRY M. MAUTNER, GENE K. OGILVIE, FATI A. ELGENDY, BRADLEY E. MAUTNER and MICHAEL D. BENNETT, with full power to each of them to act alone, as the true and lawful attorneys and agents of the undersigned, with full power of substitution and resubstitution to each of said attorneys, to execute, file or deliver any and all instruments and to do any and all acts and things which said attorneys and agents, or any of them, deem advisable to enable the Corporation to comply with the Securities Exchange Act of 1934, as amended, and any requirements of the Securities and Exchange Commission in respect thereto, relating to the Corporation's annual report on Form 10-K for the fiscal year ended January 31, 1997, including specifically, but without limitation of the general authority hereby granted, the power and authority to sign his name as director or officer, or both, of the Corporation, as indicated below opposite his signature, to such annual report on Form 10-K or any amendments or papers supplemental thereto; and each of the undersigned does hereby fully ratify and confirm all that said attorneys and agents, or any of them, or the substitute of any of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, each of the undersigned has executed this Power of Attorney as of this 30th day of April, 1997. /s/ David Unger /s/ Arnold F. Brookstone - -------------------------------------------- -------------------------------- DAVID UNGER, Director, Chairman of the ARNOLD F. BROOKSTONE, Director Board of Directors and President /s/ Henry M. Mautner /s/ Don Gruenberg - -------------------------------------------- -------------------------------- HENRY M. MAUTNER, Director, Vice Chairman DON GRUENBERG, Director and of the Board of Directors Vice President /s/ Gene K. Ogilvie /s/ Bradley E. Mautner - -------------------------------------------- -------------------------------- GENE K. OGILVIE, Director and Vice President BRADLEY E. MAUTNER, Director and Vice President /s/ Michael D. Bennett /s/ Eugene Miller - -------------------------------------------- -------------------------------- MICHAEL D. BENNETT, Vice President, EUGENE MILLER, Director Secretary and Treasurer /s/ Fati A. Elgendy /s/ Stephen B. Schwartz - -------------------------------------------- -------------------------------- FATI A. ELGENDY, Director STEPHEN B. SCHWARTZ, Director
EX-27 8 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AS OF JANUARY 31, 1997 AND THE STATEMENTS OF INCOME AND CASH FLOWS FOR THE YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS JAN-31-1996 OCT-31-1996 3,416,000 0 18,759,000 0 17,244,000 45,249,000 20,149,000 5,095,000 75,328,000 17,405,000 23,921,000 0 0 50,000 32,804,000 75,328,000 93,573,000 93,573,000 71,768,000 71,768,000 0 0 992,000 5,404,000 2,174,000 3,230,000 0 0 0 3,230,000 .70 .70
-----END PRIVACY-ENHANCED MESSAGE-----